A pilot for American Airlines Inc. has brought a proposed class action complaint against the airline, Fidelity Investments and Edelman Financial Engines for providing employees a 401(k) plan that allegedly sacrifices performance in favor of environmental, social and governance factors.

According to allegations filed in U.S. District Court for the Northern District of Texas on Thursday, the airline, its recordkeeper and financial investment advice provider caused millions in losses from poor performance and excessive fees linked to ESG strategies. The complaint was brought by pilot Bryan Spence and filed by law firm Hacker Stephens LLP, based in Austin, Texas, and Sharp Law LLP, of Prairie Village, Kansas. American Airlines declined to comment on the complaint, and neither Fidelity or ERE immediately responded to request for comment.

The complaint alleges that Fort Worth, Texas-based American Airlines’ 401(k) plan committee and administrators 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 unlawful decision to pursue unrelated policy goals over the financial health of the plan is not only flatly inconsistent with defendants’ fiduciary responsibilities, it jeopardizes the retirement security of hundreds of thousands of American Airlines employees,” the complaint alleges. “Plaintiff brings this lawsuit to remedy defendants’ breaches of fiduciary duties and for injunctive relief to prevent further violations and mismanagement of the plan.”

Spence is identified as an American Airlines pilot and lieutenant colonel in the U.S. Air Force who instructs pilots in F-16 flying. 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. According to the complaint, Spence has suffered financial damage due to the investment choices.

“A prudent fiduciary would have removed these funds, but the plan’s fiduciaries have failed to do so, costing the plan participants millions of dollars in lost earnings they would have earned had the Plan’s fiduciaries offered more prudent investments that were readily available at the time defendants selected and retained the ESG funds at issue,” the complaint alleges.

The retirement savings plan has 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.

Current DOL May Disagree

In November 2022, the Department of Labor issued guidance that explicitly stated that ESG factors may be considered in designing plan investments. The decision came after DOL guidance issued under former President Donald Trump—including final rules published in November 2020 and December 2020—noting that fiduciaries should look solely at “pecuniary” factors when making retirement saving plans, though it did not go so far as to ban ESG-related investing tactics.

The 2022 DOL decision followed an executive order from President Joe Biden to “protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.”

The complaint filed last week seeks an injunction against American Airlines, Fidelity and EFE prohibiting ESG-focused investing decisions and calls for any such funds to be removed from the plan. The plaintiffs are also seeking compensation for losses, as well as attorney and litigation fees.

The complaint alleges responsibility from American Airlines, as it has the duty to appoint and remove members of the employee benefits committee.

Boston-based Fidelity was named for being plan administrator of the plan and responsible for selecting, monitoring and removing the plan’s designated investment funds. The firm was also cited for being an “investment manager” of the plan, responsible for “selecting the investment options to be included in the plan and monitoring those investments to ensure that they remain prudent.”

Santa Clara, California-based EFE is named as the investment adviser providing investment advice to plan participants on how plan assets should be invested and managed. The complaint does not specify if this advice is given through managed accounts selected by participants or more generally.

Measuring Performance

Spence’s complaint cites a paper published in the Journal of Finance by University of Chicago researchers arguing that ESG mutual funds underperformed peers.

“The fund managers pursue an ESG agenda by voting the shares of their clients—including ERISA plan participants—on ESG proposals advanced primarily by leftist activist groups which do not seek to maximize profits or shareholder returns,” the plaintiffs wrote.

The complaint lists more than 25 investment funds specifically targeting environmental, social or governance-related tactics. It also, however, notes 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.”

The plaintiffs list more than 50 funds falling under this broader designation.

The complaint also cites a comment Vanguard Group CEO Mortimer Buckley made in a news article noting that the firm’s research “indicates that ESG investing does not have any advantage over broad based investing.” In December 2022, Vanguard made headlines when it left a net-zero climate group for asset managers. Vanguard noted at the time that participation in such groups can “cause confusion about the views of individual investment firms.”

The timeline for the complaint against American Airlines is listed from 2015 to the present, which would be subject to DOL guidance issued by three different administrations.