American Airlines 401(k)s flying high

Eighteen months after completing a merger with US Airways, American Airlines Group Inc. rolled out two new 401(k) investment menus focusing on consolidation, customization and greater simplicity for its 120,000 participants.

Each of the new investment menus — one for pilots and another for other employees — for the first time features custom target-date funds and white-label passive and actively managed options. They also include self-directed brokerage accounts and managed account options.

Fort Worth, Texas-based AMR Corp. completed its merger with Tempe, Ariz.-based US Airways Group on Dec. 9, 2013, with the US Airways brand ending in late 2015.

The two airlines' 401(k) assets, which totaled approximately $13 billion as of Nov. 1, were brought under a single record keeper, Fidelity Investments, in June 2015, and transferred to the new lineups on Oct. 30.

American Airlines pilots and other employees had been covered under a single plan administered by Empower Retirement, formerly J.P. Morgan Retirement Plan Services. US Airways had four plans — two for pilots and two for other workers — all administered by Fidelity.

Seeing the merger as an opportunity to consolidate and revamp its 401(k) offerings, American Airlines rolled out one 401(k) plan for pilots and another for all other employees. Work on the new plans began in 2013. Replacing five traditional lineups with two custom ones was a “very complicated project” that took time, said Ken Menezes, managing director, treasury, asset management, at American Airlines. In addition to design time, time was required to communicate the changes with employees, he said.

Two of the redesign's “overriding principles” were keeping expenses low and making asset allocation decisions easier, said David Pulford, director, retirement strategy, at American Airlines.

Mr. Menezes said fees — already low in the legacy plans — are generally lower across the new plans. In the new custom target-date funds, for instance, costs were kept low in part by using some index funds, he said.

The new pilots plan features 20 core investment options — nine active funds, 10 index funds and a custom target-date fund series. The new non-pilots lineup features 15 core investment options — nine active, five index and a custom target-date fund series. The five legacy plans had 55 different fund options combined.

The new plans are tiered, with target-date funds making up the first tier, index funds in the second tier, active funds in the third tier and a brokerage account option in the fourth tier.

The target-date funds are a mix of the passive and active strategies offered as the stand-alone options in tiers two and three. The funds' glidepaths are also customized. Most investments were defaulted to an appropriate target-date fund when the plans merged unless specific fund options were selected. Aon Hewitt was the consultant on the glidepaths and also manages them for the plan.

Kevin Sheth, manager, treasury, asset management at American Airlines, said the custom target-date funds help address the unique investment needs of pilots, who are required under federal law to retire at age 65. So although both plans contain 11 custom target-date funds with the same vintage years, the glidepath of the pilots plan moves to a more conservative allocation quicker. “Pilots are going to glide down a little quicker than non-pilots would,” Mr. Sheth said.

Another consideration for forming the glidepaths was participants' varying levels of defined benefit accruals, Mr. Sheth said. US Airways' DB plans were terminated in 2003, and American Airlines' DB plans were frozen in 2012.

The custom target-date funds account for 40% of assets across both plans.

The legacy American Airlines plan previously had risk-based asset allocation funds managed by American Beacon Advisors Inc., while the legacy US Airways plans offered Pyramis Global Advisors LLC's core lifecycle series.

The second tier of the new plans consists of four passive white-label options for both plans; they track the Barclays Capital U.S. Aggregate Bond index, S&P 500 index, MSCI EAFE Net Dividend Return index and MSCI Emerging Markets Net Dividend Return index. All four are collective investment trusts managed by BlackRock Inc.

Pilots have six additional options under tier two — five additional CITs managed by BlackRock that track various U.S. equity indexes and one CIT managed by State Street Global Advisors that tracks the Barclays U.S. Corporate High-Yield Very Liquid Bond index. Non-pilots also have a fifth option under the second tier — a BlackRock CIT that tracks the Russell 2500 index.

Tier three is composed of nine actively managed options. Six are white-label strategies with one or more underlying managers. The remaining three options are holdovers from the legacy plans — the Fidelity institutional money market account; a stable value fund; and the American Airlines Federal Credit Union Account, which is similar to a bank account.

Mr. Menezes said incumbent managers from the legacy plans were first considered for the new lineups. Among things considered were their fit with the new white-label structure, risk and performance, and continuity of their investment teams.

T. Rowe Price Group Inc., an underlying manager in the U.S. smidcap equity strategy, was an incumbent for both legacy plans and was retained. American Beacon Advisors Inc. and its various subadvisers were also retained for the new plans.

The new white-label structure simplifies the investment menu for participants and makes it easier to build well-diversified portfolios, Mr. Sheth said.

In domestic large-cap equity alone, at least 11 different funds were offered across the five legacy plans. Because of so many options for the same asset class, legacy U.S. Airways and American Airlines participants risked overallocating to a single asset class, Mr. Sheth said.

Under tier three of the new structure, participants see just one domestic large-cap value or growth equity fund made up of multiple underlying managers.

The fourth tier is a self-directed brokerage account through Fidelity. Managed accounts with the Financial Engines Inc. are also offered. The former American Airlines plan offered managed accounts and a self-directed brokerage account from Empower. The US Airways plans offered a brokerage account through Fidelity. It did not offer managed accounts.

Communication efforts around the redesign included print and online resources and in-person meetings.

More than 70,000 participants visited a transition website for the new plans to check out the changes, and a high percentage made investment elections at that time, Mr. Menezes said.

Aon Hewitt was hired as the general consultant for the new plans. Wells Fargo & Co. was the consultant for the US Airways plans and American Beacon Advisors was the consultant for the American Airlines plan. American Beacon remains a consultant for the American Airlines DB plan.