American's response wasn't good enough for U.S. District Court Judge Reed O'Connor, who ruled Feb. 21 that the plaintiff "articulates a plausible story," agreeing with the assertion that the company and its fiduciaries violated ERISA's duty of loyalty, which governs allegations that defined contribution plans put their interests ahead of their participants.
"Defendants' public commitment to ESG initiatives motivated the disloyal decision to invest plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments, all while failing to faithfully investigate the availability of other investment managers whose exclusive focus would maximize financial benefits for plan participants," O'Connor wrote.
"Taking these allegations as true, the court finds that plaintiff plausibly alleges at this stage that defendants violated their duty of loyalty under ERISA," the judge wrote.
"These allegations do more than reach the mere conclusion that defendants acted disloyally," he wrote. "Instead, plaintiff's allegations provide specific facts outlining a plausible theory for how defendants breached their duty of loyalty by allowing their corporate goals to influence their fiduciary role."
In his ruling, O'Connor summarized the dueling comments by the plaintiff, who is seeking class-action status, and by the defendants.
"According to plaintiff, funds managed by ESG-focused investment managers have continually underperformed compared to other similarly situated funds due, for example, to investment managers casting proxy votes for ESG measures," he wrote.
"Plaintiff contends that defendants knew or should have known of this underperformance yet selected and retained these investment managers despite knowledge that those managers pursued nonpecuniary ends," O'Connor wrote, reviewing the plaintiff's allegation that plan fiduciaries also violated ERISA's duty of prudence guidelines.
The judge noted that the defendants argued that the plaintiff's allegations "are insufficient to state a claim because plaintiff provides no benchmark by which to compare performances."
The defendants also said the plaintiff "neither alleges any facts specifically showing how investment managers' funds underperformed nor provides facts connecting the investment managers' proxy votes for ESG measures to the alleged underperformance," O'Connor wrote.
The judge rejected the defendants' response. "At this stage, the court finds that plaintiff has provided sufficient facts to support his breach of prudence claim," he wrote. "At this stage, plaintiff need not plead the exact connection between the investment managers' alleged ESG proxy voting and the financial harm plaintiff suffered as a result."
O'Connor added that the plaintiff didn't have to prove that every ESG investment harmed participants. "Instead, plaintiff has adequately alleged that defendants breached their duty of prudence by selecting, including, and retaining investment managers who pursue ESG objectives rather than focusing exclusively on maximizing financial benefits," he wrote.
"These specific actions — selecting, including, and retaining ESG-oriented investment managers — allow the court to reasonably infer that defendants' process is flawed because it allowed Plan assets to be used to support ESG strategies," O'Connor wrote.
In his original complaint, the plaintiff also sued Edelman Financial Engines, an investment adviser, and Fidelity Investments, the record keeper, in the proposed class-action suit. They were later dropped as defendants.
American Airlines Inc. 401(k) Plan for Pilots had $9.1 billion in assets, and the American Airlines Inc. 401(k) Plan had $12.8 billion in assets as of Dec. 31, 2022. Both plans are based in Fort Worth, Texas, and the data for both is from the latest Form 5500.
