Airline’s Excessive Fee Turbulence Settles

American Airlines has come to terms with participant-plaintiffs in an excessive fee lawsuit.

The airline – and its former investment management subsidiary American Beacon – have agreed to a $22 million settlement (Main v. Am. Airlines, Inc., N.D. Tex., No. 4:16-cv-00473-O, motion for preliminary settlement approval filed 7/7/17) in an excessive fee lawsuit where plaintiffs had alleged that a prudent fiduciary would not retain the American Beacon Funds because their funds:

  • were more expensive than similar alternatives;
  • underperformed compared to other similar investments; and
  • were not included in other 401(k) plans.

Indeed, the plaintiffs had alleged that the plan and its participants would have realized tens of millions of dollars more in investment returns, net of fees, between 2010 and 2015 had the defendants replaced the American Beacon Funds with prudent alternatives available in the marketplace in 2010.

Earlier this year the U.S. District Court for the Northern District of Texas rejected the argument that it was imprudent to use mutual funds rather than collective trust funds or separate accounts in a 401(k) plan. However, at the same time defendant American Airlines failed to win dismissal of charges that it acted imprudently in forcing its employees into what were allegedly expensive, poorly performing mutual funds offered by American Beacon Funds, an affiliated investment company.

Unlike other similar settlements, this one outlines no change in plan design or fee structures. It does note that under the settlement, “Class Counsel will limit their request for attorneys’ fees to no more than thirty percent (30%) of the Gross Settlement Fund, plus reasonable litigation expenses and the Administrative Expenses of the Settlement,” and that the Settlement Agreement provides that service awards of up to $10,000 may be sought for the Class Representatives, subject to court approval, to compensate them for the time, effort and risks they assumed in connection with this action.

In justifying the reasonableness of the settlement, the plaintiffs outline the extensive discovery and document process already undertaken, and the fact that the $22 million gross settlement amount equals more than 62% of American Beacon’s estimated revenues associated with American Beacon Funds during the Class Period, and almost 100% of the difference between the expenses of the American Beacon Funds and their 2015 replacements.

It’s also interesting that in acknowledging the potential risk in continuing to pursue litigation, the plaintiffs cite the recent decision in Brotherston v. Putnam Invs., LLC, 1:15-cv-13825 (D. Mass.), another ERISA action relating to the inclusion and retention of proprietary mutual funds in an employer-sponsored retirement plan, where the district court found that the plaintiffs “failed to establish a prima facie case of loss” at trial. “Although it is anticipated that the adverse ruling in Putnam will be appealed, it shows that the risks in these types of cases are anything but hypothetical,” they explained.

The plaintiffs in the case are represented by Nichols Kaster PLLP, Cunningham Swaim LLP, and Kendall Law Group LLP. The case is still pending before Judge Reed C. O’Connor in the U.S. District Court for the Northern District of Texas. The settlement must be approved by the judge before becoming final.

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