American Airlines Seeks Dismissal of 401(k) ESG Complaint

American Airlines Inc. has requested a federal judge dismiss a complaint brought by a pilot alleging the company sacrificed investment performance in its 401(k) plans in favor of environmental, social and governance factors.

In a motion to dismiss filed Friday, attorneys representing American Airlines and its employee benefits committee argued that the plaintiff had no grounds to sue, in part because the ESG, or “Challenged,” funds in question were not in the core retirement investment menu offered to participants. They were only available through the self-directed brokerage window and, furthermore, the plaintiff himself had not invested in the funds listed in the complaint, according to the court filing.

“It would have been impossible for Plaintiff to find any such investment options in the Plans’ core investment lineup, where he has chosen to invest, because there are none,” American Airlines attorneys wrote in the motion. “Rather, the Challenged Funds and investment options by the Challenged Managers are available to participants exclusively through a self-directed brokerage account.”

The SBDA, as it is known, allows retirement plan participants to choose investment options outside the core fund lineup, something the plaintiff never opted to do, let alone to invest in the funds listed in the initial complaint, according to American Airlines.

The initial complaint, Spence et al. v. American Airlines et al., was brought on June 2 by pilot Bryan Spence and filed in U.S. District Court for the Northern District of Texas. In that complaint, the plaintiff alleges that American Airlines’ 401(k) plan committee and administrators, along with providers Fidelity Investments and Edelman Financial Engines, violated their fiduciary duties under the Employee Retirement Income Security Act by investing employees’ retirement savings in “investment managers and investment funds that pursue leftist political agendas” through ESG strategies, proxy voting and shareholder activism.

The plaintiff alleges that some ESG-based funds included in the plan are both more expensive for participants when compared to similar, non-ESG investment funds, and focused on shareholder activism to achieve policy agendas rather than maximizing plan outcomes. The complaint alleges that pilot Spence suffered financial damage due to the investment choices, a claim American Airlines’ attorneys are refuting with the argument he never actually had investments in the funds in question.

“Plaintiff’s lack of standing warrants dismissal of the Complaint in its entirety,” American Airlines wrote in the motion.

Grounds for Dismissal

In its request for dismissal, defense attorneys went on to argue that Spence’s “inability” to allege that ESG funds were available in the core investment plan lineup, and therefore subject to fiduciary selection and monitoring by the plan committee, is grounds for dismissal of the case.

“Only by expressly alleging that the options he challenges were included in the core lineup would Plaintiff be able to state a claim under his theories—and Plaintiff does not do so,” the defendants wrote.

American Airlines attorneys also argued that the plaintiff did not prove his allegations that the funds were inferior to other options. The defendant noted that the plaintiff did not back up claims that the fund managers delivered lower returns as compared to other options. “Indeed,” they wrote, “he doesn’t even bother to discuss the financial performance of a single investment option sponsored by a Challenged Manager.”

The attorneys went on to note that an assertion in the complaint that plan fiduciaries should not consider investment products from managers who have cast a proxy vote for an ESG-based policy regardless of performance is “as wrongheaded as it sounds.”

“Acceptance of Plaintiff’s theory would compel ERISA fiduciaries to ignore actual investment performance and instead screen out investment options ‘based on non-pecuniary factors’ (i.e., the manager’s proxy voting record), potentially harming participants by depriving them of access to some of the best performing, most popular, and highest rated funds on the market,” they wrote.

The initial complaint lists more than 25 investment funds specifically targeting environmental, social or governance-related tactics. It also, however, noted funds that, while not branded ESG, “are managed by investment companies who have voted for many of the most egregious examples of ESG policy mandates, on issues such as divesting in oil and gas stocks, banning plastics, requiring ‘net zero’ emissions, and imposing ‘diversity’ quotas in hiring.”

Alternative Investments

In the motion to dismiss, defense attorneys argued that, within the plaintiff’s 401(k) plan, there were a choice of alternative investments that did not, in fact, include the ESG-funds cited in the complaint.

Rather, they offered index funds in a collective investment trust managed by BlackRock Institutional Trust Co. or State Street Global Advisors; an inflation protection fund that has invested exclusively in a BlackRock TIPS Index Fund managed by BlackRock; an option that makes deposits in the American Airlines Federal Credit Union; and a stable value option that invests exclusively in a stable return fund managed by Galliard Capital Management. The alternative options also included between five and six actively managed custom funds arranged for plan participants by the retirement plan committee, the motion noted.

American Airlines’ retirement savings plans have more than 100,000 participants and about $26 billion in plan assets, according to the complaint. The Department of Labor’s Form 5500 database lists 105,789 participants and $15.5 billion in assets for the American Airlines Inc. 401(k) Plan, as of the most recent data from October 2022. It lists 16,488 participants and $11.1 billion in assets for the American Airlines Inc. 401(k) Plan for Pilots from the same date.

The Department of Labor issued guidance late last year stating that ESG factors may be considered in designing plan investments in a decision closely observed by many ERISA attorneys and retirement plan advisers. The rule reversed DOL guidance issued under former President Donald Trump noting that fiduciaries should look solely at “pecuniary” factors when making retirement saving plans, though the Trump-era guidance did not go so far as to ban ESG-related investing tactics.