American Airlines to Face Court Over Alleged ESG Retirement Fund Mismanagement

By Annie Stephan Feb 23, 2024 12:41 AM EST

In Fort Worth, the federal judiciary has given the green light for a lawsuit against American Airlines Inc. concerning its use of ESG criteria in retirement plans. The case, initiated by a pilot, moves forward despite the airline's motion to dismiss. This pilot has made allegations that ESG-focused investments within the company retirement plans are not compliant with the guidelines of ERISA.

(Photo : Unsplash/ Joshua Hanson)

Earlier Attempts at Dismissal Rejected

The lawsuit, kicking off on June 7 and later seeing amendments, resulted in American Airlines promptly seeking to dismiss the claims. The airline contended that its retirement plans did not include Environmental, Social, and Governance (ESG) investment options.

Furthermore, the airline emphasized that the plaintiff did not partake in any ESG strategy from the implicated investment managers. However, this defense did not withstand scrutiny by Judge Reed O'Connor, who ruled on February 21 that the pilot's allegations bore enough merit to proceed.

How Are Loyalty Duties Allegedly Breached?

Judge O'Connor's ruling paints a complex picture of alleged mismanagement. The plaintiff asserts that American Airlines, driven by ESG commitments, chose and kept asset managers who prioritized ESG goals over economic returns to the detriment of the performance of retirement plan investments. O'Connor acknowledged these claims as potentially valid, allowing the case to progress.

Underperformance and Fiduciary Duties

The central thrust of the plaintiff's arguments is that funds managed by ESG-oriented managers did not perform as well as their counterparts, potentially indicating a breach of fiduciary duties as specified by ERISA. It's claimed that American Airlines should have known about this underperformance but continued to work with these managers who aimed beyond the plan participants' direct financial interests. Judge O'Connor detailed that the airline challenged this claim, citing a lack of specific benchmarks for comparison and insufficient tangible evidence tying ESG-focused proxy voting to poor fund performance.

Has Prudence Been Compromised?

Diving deeper into ERISA's prudence expectation, the plaintiff suggested that American Airlines did not perform due diligence in their manager selection, subsequently impacting the retirement funds' health. The judge articulated that at this phase of the proceedings, the plaintiff's accusations were adequately substantiated to support a breach of prudence claim, even without pinpointing the precise link between the alleged proxy voting activities and financial injury to the participant.

ALSO READ: West Virginia House Unanimously Approves Social Security Tax Phase-Out, Aiming for Full Exemption by 2026

The Role of Investment Managers

The legal narrative suggests that American Airlines' fiduciaries are culpable for a flawed selection process, allowing plan assets to support ESG strategies that may not align with maximizing financial benefits. It was within Judge O'Connor's prerogative to deduce that selecting, including, and retaining ESG-focused managers indicated that the investment process was compromised.

Wide-Ranging Implications for Retirement Assets

American Airlines' retirement plans hold considerable assets, with the 401(k) Plan for Pilots boasting $9.1 billion and the general 401(k) Plan holding $12.8 billion as of December 2022. Therefore, the proceedings of this case could significantly influence the future management of these substantial funds and set notable benchmarks for ESG investment strategies within retirement plans.

Judge's Rulings Set the Stage for ESG Investment Scrutiny

As the case evolves, the American Airlines retirement plans have become a battleground over ESG investment criteria's place within ERISA-guided retirement funds. With a federal judge dismissing the airline's dismissal request, the case is on course for trial, where an in-depth examination into fiduciary decision-making related to ESG investments will occur. Judge O'Connor has signaled that sufficient grounds have been laid out at this juncture to question the prudence of the fiduciary actions of American Airlines Inc. in their retirement plans' management. This juncture could mark a pivotal moment for the future of ESG investing within corporate retirement strategy.