A new excessive fee lawsuit challenges the use of revenue-sharing, a bloated fund menu with duplicative funds, and a failure of plan fiduciaries to leverage the plan’s size to get a better deal.
The case was brought by two participants in one of the 401(k) plans offered by Delta Air Lines, against Delta as the sponsor of that plan and against the plan’s administrators. The suit itself, Johnson v. Delta Air Lines Inc. (D. Del., No. 1:16-cv-01275, complaint filed 12/20/16), is a mere 35 pages long, and provides less blow-by-blow detail than many of these excessive fee lawsuits.
As many of these suits have done, it charges that the $7.5 billion plan ($5.6 billion in 2012) offered its approximately 83,000 participants (as of 2012) “higher-cost options, duplicative options, and underperforming options to Plan participants,” that they “failed to leverage the Plan’s massive bargaining power to obtain lower costs and fees for Plan participants,” and that, “as a direct result of these failures, Defendants drained millions of dollars in fees, expenses, and underperformance from Plan participants’ retirement savings.”
Duplicative Choices?
Noting that a “typical 401(k) plan offers roughly fourteen investment options,” the suit notes that there were at least 200 investment options in the plan prior to 2011. However, the plaintiffs claim that “Many of these were functionally equivalent or otherwise duplicative and added nothing but confusion to the set of options available to participants. Even within each class of investments, Defendants offered far more investment options than was reasonable.” The suit claims that “providing an overwhelming array of options to Plan participants did not benefit them in any way, and in fact harmed them instead.”
Moreover, they claim that “it is no defense to say that Plan participants were not harmed because they could have simply selected other options instead of the inferior ones from the set of investment options that they were offered.”
That lineup was changed prior to the litigation, though the plaintiffs charge that the plan fiduciaries “only belatedly consolidated the Plan’s roughly 200 investment options into a simplified, reliable core lineup in which prudent and appropriate investments were available for each asset class and investment style.” Conceding that doing so “provided participants with a fair and reasonable menu of investment options while minimizing costs,” the suit charges that they delayed doing so until 2011. “Until then, Defendants retained duplicative and redundant investment options in each asset class, thus diluting the Plan’s bargaining power, failing to minimize costs, and increasing complexity and confusion to the participants.”
Revenue ‘Shearing’?
The suit also challenges the plan’s revenue-sharing arrangement with its recordkeeper, cautioning that “revenue sharing more often functions as sleight of hand to hide fees from Plan participants, because it enables the mutual funds to present to participants investment options which appear to have especially low fees, even though those fees are generally included on the recordkeeping side instead.” In fact, they claim that “because the increased recordkeeping fees are generally not the focus of scrutiny, and because they generally provide for compensation based on the total size of the assets rather than a flat fee, as described above, it is likely that revenue sharing actually results in higher total fees charged to the Plan, even while the participants believe that their fees have been lowered.”
In addition to charging that the plan fiduciary/defendants failed to undertake a competitive bidding process, the suit notes that while they paid flat, per participant fees as direct compensation to Fidelity for recordkeeping services, they also paid indirect compensation based on the amount of invested assets from 2010 through 2012, ranging from 5 basis points to 55 basis points, depending on the fund, resulting in “excess and unnecessary” fees (according to the suit, payment of 35 basis points, the most commonly used rate for mutual funds in the Plan, would equate to $19.95 million). The plaintiffs claim that all indirect compensation was in addition to the direct compensation paid to Fidelity, “which itself constituted a generous fee for the services provided to the Plan,” and thus they claim that the “indirect compensation paid to Fidelity was superfluous,” going on to note that the indirect compensation through revenue sharing “merely piled excess upon excess.”
The suit, which seeks class action status, was filed in the U.S. District Court for the District of Delaware on Dec. 16 by the New York-based law firm of Tacopina & Seigel. The plaintiffs were participants in the Delta Family Care Savings Plan, as were plaintiffs in an excessive fee suit filed against Delta earlier this year. That suit challenged the fee arrangement between Financial Engines and Fidelity, as well as the choices provided participants via a plan’s self-directed brokerage account.
