American Airlines Fails to Get Affiliated Funds Claims Dismissed

A federal district court judge has denied most motions to dismiss filed by American Airlines in a case accusing the firm of including affiliated funds in its retirement plan investment lineup though they were more expensive and lower-performing than other funds.

The Case 

The core of the plaintiffs’ claims relate to the use of American Beacon Funds in the plan. AMR Corp., American Airlines’ parent company, created a line of mutual funds that were managed by another subsidiary of AMR Corp. This fund manager was later renamed American Beacon Advisors, Inc. in 2005. These mutual funds were then known as American Beacon Funds.

According to the court opinion, AMR Corp. sold American Beacon Advisors, Inc. in 2008 to Lighthouse Holdings, Inc. As a part of this deal, AMR Corp. received an equity stake in Lighthouse Holdings, Inc. Plaintiffs contend that this sale was premised on American Airlines’ continued use of American Beacon Funds in the plan. Although American Airlines employed an independent third party to approve the continued use of American Beacon Funds in the Plan, Plaintiffs allege that this was done merely to “whitewash” American Airlines’ actions.

Plaintiffs claim that the defendants breached their fiduciary duties because a prudent fiduciary would not retain the American Beacon Funds because they were more expensive than similar alternatives; American Beacon Funds underperformed compared to other similar investments; and American Beacon Funds were not included in other 401(k) plans. Plaintiffs also allege that defendants breached their duty of loyalty by not removing the overly expensive and underperforming American Beacon Funds.

In 2015, Lighthouse Holdings, Inc. sold its interest in American Beacon Advisors, Inc. According to the plaintiffs, this eliminated any financial interest American Airlines had in the plan’s use of American Beacon Funds. Then, later in 2015, the plan’s fiduciaries removed the American Beacon Funds. And shortly thereafter, the American Beacon Funds ceased to exist because, according to plaintiffs, they were marketplace failures that prudent investors would not choose.

Defendants American Airlines Inc., the Pension Asset Administration Committee, the Benefits Strategy Committee (BSC), the Pension Benefits Administration Committee (PBAC), and the Employee Benefits Committee filed a motion seeking to have all of plaintiffs’ claims dismissed.

The defendants argue that the plaintiffs have failed to set forth a valid theory of disloyalty because an independent third party reviewed and approved the continued use of American Beacon Funds after American Beacon Advisors was sold to Lighthouse Holdings, Inc.; Department of Labor regulations allow plan investments managed by the plan sponsor itself; and the plan did not include all American Beacon Funds and, in fact, not all American Beacon Funds were sold after Lighthouse Holdings, Inc. sold American Beacon Advisors.

U.S. District Judge Reed O’Conner noted that the plaintiffs do factually allege that the independent fiduciary was not involved after the sale of American Beacon Advisors to Lighthouse Holdings, Inc., and so, even if the independent third party did conduct a faithful assessment, the plaintiffs’ allegations that defendants continued to retain American Beacon Funds after the sale was complete cannot be mitigated by the use of an independent fiduciary at the time of American Beacon Advisor’s sale. “In other words, Plaintiffs argue Defendants would have breached their duty of loyalty by retaining American Beacon Funds after the American Beacon Advisors sale was complete and after the independent fiduciary ceased to be involved,” O’Conner wrote. “To say at this stage in the litigation that engaging a third party fiduciary establishes that Defendants acted loyally during the entire period of time that Plaintiffs complain of would require the Court to draw an impermissible inference against Plaintiffs. Accordingly, the Court does not find that dismissal is warranted on this basis at this time.”

O’Conner conceded that Department of Labor regulations allowed investments in plans that are managed by the plan sponsor. However, he noted that is not the whole of the plaintiffs’ allegations. Plaintiffs allege not only that the defendants chose affiliated investment options but also that those investment options either charged higher fees than similar options or that those options were underperforming and that the defendants failed to investigate the availability of cheaper alternatives. Taking these allegations as a whole, O’Conner denied dismissal on this basis.

Lastly, the defendants argue that American Beacon Funds were included in the plan on their merits, and they offer an alternative explanation for why the plan dropped the American Beacon Funds after Lighthouse Holdings, Inc. sold American Beacon Advisors. But, O’Conner said that agreeing with the defendants would require the court to draw inferences against the plaintiffs which is not permitted at this stage in the legal proceedings, so it denied dismissal on this basis.

O’Conner addressed the allegation that the defendants were imprudent by including American Beacon index funds that were more expensive than nearly identical index fund alternatives. For example, the plaintiffs allege that the plan included American Beacon S&P 500 Index Fund, which charged fees seven times higher than an identical Vanguard fund. The defendants argue that they had no duty to seek out the cheapest possible index funds. Defendants cite the 7th U.S. Circuit Court of Appeals decision in Hecker v. Deere & Co. as well as the 8th U.S. Circuit Court of Appeals decision in Braden v. Wal-Mart Stores, Inc., for this proposition. But, according to O’Conner, in applying Braden, courts have denied motions to dismiss where plaintiffs alleged that the defendants failed to consider lower cost funds with identical styles and stocks. He found that while drawing all reasonable inferences in favor of the plaintiffs, they have plausibly stated a claim.

The plaintiffs also allege the defendants were imprudent by retaining poor-performing actively managed funds, specifically the American Beacon Short-Term Bond Fund, the American Beacon Large-Cap Growth Fund, and the American Beacon Treasury Inflation Protected Securities Fund. The defendants rely on a number of materials outside the pleadings to argue why the inclusion of these three funds was not imprudent. O’Conner said, while the Court may take judicial notice of those materials, it may not rely on the parties’ opinion about what the proper inferences should be drawn from them, so he found that dismissal is not warranted at this time.

One point on which O’Conner agreed with the defendants regarded the plaintiffs' argument that the defendants breached their duty of prudence by failing to consider low-cost separate accounts and collective trusts as alternatives to mutual funds. O’Conner cited a 7th Circuit case in which it held that offering mutual funds instead of other lower cost alternatives is not imprudent, and agreed with its reasoning. “Accordingly, Defendants’ Motion is granted to the extent that Count I relies on the argument that Defendants breached their duty of prudence by not considering alternatives to mutual funds,” he wrote.

Finally, the defendants argued that Count I of the complaint should at least be dismissed as to American Airlines, the PBAC, and the BSC because they were not fiduciaries. However, O’Conner rejected this argument, saying the plaintiffs have alleged that these defendants were either named fiduciaries or had control over management of the plan.