American Airlines 401(k) Suit Over ESG Following Uncharted Path

A new lawsuit challenging American Airlines Group Inc. over its ESG 401(k) investment options presents a novel legal attack against the Biden administration’s embattled do-good investing rule, but it may prove a difficult case for plaintiffs to win.

A pilot for the airline filed the proposed class-action complaint in the US District Court for the Northern District of Texas late last week. It appears to be the first lawsuit of its kind alleging private-sector retirement plan fiduciary misconduct over environmental, social, and governance investment returns.

ESG retirement investing has emerged as a political flash-point. Advocates, including some major asset managers, believe these investments level the playing field for 401(k) savers, while detractors claim ESG will tank the accounts workers have spent their careers building.

The US Labor Department rule that green lights ESG options when they’re in the best financial interest of plan participants already faces two direct legal challenges and a skeptical Republican caucus on Capitol Hill. The new American Airlines lawsuit spotlights more untested legal theories surrounding the rule and the DOL’s position on 401(k) investments outside plans’ core menus.

“This lawsuit assumes that in order to fulfill fiduciary duties of loyalty and prudence, all individual investment options have to maximize plan assets,” said Dana Muir, a University of Michigan professor who specializes in fiduciary investment conduct and pension plan design. “They ignore the Department of Labor’s belief that ESG investments can be financially material.”

Fund Uncertainty

The lawsuit filed Friday by attorneys at Hacker Stephens LLP and Sharp Law LLP has some retirement industry observers scratching their heads over a list of 25 ESG-themed mutual funds the complaint says American Airlines and its retirement plan service providers “have selected and included” as options under the plans.

None of those mutual funds are listed under the American 401(k) plan and 401(k) plan for pilots, according to two sources familiar with the company’s plan design.

“There’s no plan in America that has 25 investments in ESG,” said Daniel Aronowitz, managing principal at Euclid Fiduciary Managers LLC. “Large fiduciaries have been leery of yo-yoing and ping-ponging between different administrations on ESG retirement investing.”

Attorneys for the plaintiff didn’t respond to multiple requests for comment on the suit and 401(k) plan structure. American Airlines officials declined to comment.

The specific funds listed in the complaint would likely be available to pilots through brokerage windows, which both 401(k) plans make available to participants and beneficiaries, according to annual Labor Department filings.

The accounts allow workers to put money into unvetted investments that exist outside the core menu of mutual funds and ETFs that are specifically picked out and monitored by employers. Together, the American Airlines plan brokerage accounts contained $3.22 billion in 2021, plan documents show—12% of the $25.99 billion in total plan value.

Brokerage window investments have historically been viewed by regulators as outside a retirement plan fiduciary’s typical duty to monitor. Otherwise, plan officials could be roped into assessing virtually every possible investment option on Wall Street, an untenable position never taken seriously in federal court, said Aronowitz.

Labor Department officials did hint at the possibility of some fiduciary responsibilities for brokerage window oversight early last year when they issued guidance on cryptocurrency investments in 401(k)s.

Turbulence Ahead

The American Airlines lawsuit faces headwinds, especially if plaintiffs plan to use it both as a mechanism for undoing the Labor Department’s position on ESG investing and challenging rules for brokerage windows, benefits advisers said.

“I don’t think that participants can show that all ESG funds are inferior investments,” said Muir.

The plaintiff’s all-or-nothing theory of ESG investing hinges on academic working papers and at least one performance review of a public pension plan’s ESG investing prowess, according to the complaint.

Despite scrutiny over the lawsuit, the Texas federal district court where it was filed is broadly considered one of the nation’s most conservative, responsible for undoing a slew of Biden administration policies. The Justice Department even accused conservative state attorneys general in one of the ongoing legal challenges to the ESG rule of venue shopping in the Northern District.

Judge Reed O’Connor, who is overseeing the case, is a George W. Bush appointee well known for gutting much of the Affordable Care Act in 2015.

Attorneys for the American Airlines pilot filed a motion to leave without local counsel in order to keep the case in the Northern District court without designating local attorneys.

Public pensions have already been at the center of a legal effort to boot out pro-ESG investment managers in states such as Florida and Texas. Three New York City pension plans fell victim to a lawsuit last month that claims they failed their fiduciary duties by selling off fossil fuel assets.

“Trillions of dollars are on the line, and we’re counting on that money when we retire,” said Natalia Renta, senior policy counsel for corporate governance and power at the Americans for Financial Reform Education Fund.