(NAPA - National Association of Plan Advisors) - LITIGATION
A participant lawsuit claims that American Airlines has put retirement savings at risk by investing with managers and funds that “pursue leftist political agendas through environmental, social and governance ('ESG') strategies, proxy voting, and shareholder activism.”
Participant-plaintiff (and pilot) Bryan P. Spence[i] has filed suit in the U.S. District Court for the Northern District of Texas against Defendants American Airlines, Inc., American Airlines Employee Benefits Committee, Fidelity Investments Institutional,[ii] and Financial Engines Advisors, LLC,[iii] alleging that they “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (“ESG”) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants.”
Furthermore, the suit states that “the unlawful decision to pursue unrelated policy goals over the financial health of the Plan is not only flatly inconsistent with Defendants’ fiduciary responsibilities, but it also jeopardizes the retirement security of hundreds of thousands of American Airlines employees.”
The suit (Spence v. Am. Airlines, Inc., N.D. Tex., No. 4:23-cv-00552, complaint 6/2/23) begins by stating that the defendants owe specific duties to the Plan and its participants and beneficiaries, “including duties of loyalty and prudence to design and select a portfolio of funds to offer as investment options, and a continuing fiduciary duty to monitor, and, if necessary, alter the investment options available to Plan participants.” They go on to explain that those defendants have selected and included as investment options “numerous investment funds that pursue ESG policy goals through their investment strategies, proxy voting, and shareholder activism.”
Expense ‘Sieve?’
The suit notes that many of the ESG funds disclose strategies that “exclude or screen out companies and potential investment opportunities that do not meet certain ESG standards,” and that many of those included in the plan “are more expensive for Plan participants to own compared with similar non-ESG investment funds, underperform financially compared with similar non-ESG investment funds, and engage in shareholder activism to achieve ESG policy agendas rather than maximize the risk-adjusted financial returns for Plan participants.”
The suit alleges that “defendants have breached their fiduciary duties of loyalty to the Plan and the Plan participants and beneficiaries by selecting and retaining as investment options under the Plan ESG funds and funds that are managed by investment companies that pursue ESG objectives through proxy voting and shareholder activism”—actions that the suit says are prohibited “because ERISA mandates that the exclusive purpose of investments is to maximize financial benefits for participants and beneficiaries.”
“A prudent fiduciary would have removed these funds, but the Plan’s fiduciaries have failed to do so,” the suit continues, “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.” Nor, according to the suit, were these “the result of mere negligence or oversight. To the contrary, Defendants selected the ESG funds and included them as investment options with knowledge of their non-financial investment objectives, higher costs of owning ESG funds, poor financial performance of ESG funds, and ESG fund shareholder activism to achieve social policy changes rather than maximize the risk adjusted financial returns.” In fact, the suit claims that “defendants selected these funds and continued to hold them within the Plan after they had become imprudent to further their own preferences and interests.”
Manager Motivations?
After listing the ESG funds on the plan investment menu, the suit claims that the “defendants did not independently investigate these ESG funds before including them as investment options under the Plan, did not independently monitor them once in the Plan, and did not remove ESG funds from the Plan.” They go on to assert that the “defendants have also included in the Plan funds that are not branded as ESG funds but 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 suit notes that “none of the proposals were supported by management at the targeted companies, and the investment managers’ votes were typically made without the approval, or even the awareness, of Plan participants.”
Beyond the ESG options themselves, the suit cites proxy voting records of a (long) list of investment managers chosen by the plan that it says, “pursue nonfinancial and nonpecuniary ESG objectives as investment managers for non-ESG branded funds that have been included as investment options in the Plan.”
Stay tuned.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
[i] He is represented in this action by Hacker Stephens LLP and Sharp Law LLP.
[ii] Fidelity Investments Institutional, named as the Plan administrator under the most recent amendment of the Plan, was responsible for selecting, monitoring, and removing the Plan’s designated investment options. The suit claims that as it exercises discretionary authority and discretionary control over management of the Plan, administration of the Plan, and management and disposition of the Plan’s assets, it is a named fiduciary of the plan.
[iii] According to the suit, Financial Engines Advisors, LLC is an investment advisor selected by the other Defendants to provide investment advice to Plan participants on how Plan assets should be invested and managed. Financial Engines receives substantial direct and indirect compensation for providing investment advice and management services to Plan participants, an “investment manager” of the Plan as defined by 29 U.S.C. § 1002(38) and a functional fiduciary of the Plan…”
By Nevin E. Adams, JD
June 5, 2023
