Lessons learned from a tidal wave of 401(k) fee suits: How to keep your company safe

Delta Airlines recently became the latest organization embattled in a highly publicized retirement plan lawsuit over its allegedly excessive 401(k) fees. Unfortunately, the company could’ve avoided its fate by taking a few extra steps. 
At the 2017 Mid-Sized Retirement & Healthcare Plan Management Conference in Phoenix, AZ, Richard T. Allison, the CEO of SWBC Investment Advisory Services, used the class-action lawsuit against Delta — Johnson v. Delta Airlines, Inc. — as a warning to employers and plan sponsors about what could happen if you don’t take the right precautions and ask the right questions of your retirement plan providers and record keepers.

‘The No. 1 Litigation Area’

As Allison pointed out, “Far and away, the number one area for [retirement plan] litigation is excessive fees.”
The Delta lawsuit involved not only the company but also individual members of the retirement plan committee and other plan fiduciaries.
The claim: Delta failed to both select low-cost investments and use the plan’s size to negotiate cheaper record keeping fees. Specifically, the company is accused of failing to undertake a competitive bidding process for record keeping services and not limiting or monitoring record keeper compensation. According to the suit, Delta paid a flat, per-participant fee as direct compensation as well as indirect comp that wasn’t even monitored.
Delta’s investment options were also unnecessarily complex. For example, a typical 401(k) offers around 14 investment options. At one point Delta offered more than 200 investment choices, many of which were essentially the same. That resulted in confusion for participants and, because the airline didn’t adequately monitor the funds, allowed many poorly performing funds to remain in the plan, the suit claimed.

4-step strategy

According to Allison, the company could’ve avoided its unfortunate fate by asking strategic questions and taking the following four steps:
1. Structure, discipline and documentation. Employers should focus on benchmarking how their plan compares to their peers in terms of record keeping fees, investment expenses and performance, and any recurring expenses paid out of participant accounts. Firms should also keep formal documentation of all deliberations and decisions regarding plan investments and have proof of a prudent process for all decisions.
2. Annual due diligence. At least annually, Allison recommends asking for audited financials, regulatory filings, professional liability coverage for ERISA and contract requirements.
3. Evolving targets. Firms need to monitor the following things and see if changes are necessary:

  • Capital preservation — money market vs. stable value
  • Seldom documented investments — everything from stable value and target-date funds to managed accounts
  • Concentrated holdings — look at the number of holdings and sector bets as well as any odd allocations, and
  • Fee methodology — regularly ask how charges are being assessed to participants.

4. An engaged committee. Finally, an effective retirement plan committee is one of the best ways to prevent a 401(k) fee lawsuit. For a committee to work properly, there must be regular meetings, well-kept minutes and consistent attendance from all members.