Lawsuit over ESG in 401(k) not cleared for takeoff, American Airlines says

ESG-themed funds named in the case are only available through a brokerage window, the defendant noted.

The first lawsuit over the use of ESG in a 401(k) has a few gaping holes — most notably that the lead plaintiff in the proposed class action wasn’t invested in any of the funds in question, defendant American Airlines said.

In a motion to dismiss filed Friday, the airline also noted that the investment options at the center of the complaint are not on the $27 billion plan’s menu — they are only available through a self-directed brokerage account. The company was sued in June for allegedly breaching its fiduciary duties under the Employee Retirement Income Security Act in connection with numerous ESG-themed funds available to participants.

The lead plaintiff for the proposed class, pilot Bryan Spence, “seeks to insert himself into the ongoing, politicized debate over the wisdom of ESG-themed investing. But this is a case without a controversy,” the airline stated in its motion to dismiss. “Plaintiff does not allege that he has allocated any portion of his plan account to the challenged funds he lists in the complaint, or to any non-ESG investment options that happen to be sponsored by Challenged Managers with objectionable proxy-voting policies. Nor could he, as he has never invested either in any of the 25 funds he identifies in the complaint as ESG funds or in any investment options sponsored by the challenged managers.”

That defense gives the plaintiff little to work with, and there are significant odds that the court will scrap the case, lawyers said.

The airline’s response points out “obvious deficiencies with the complaint,” such as the lack of investments by the plaintiff and the fact that the funds were in the only available through a brokerage window, Bonnie Treichel, chief solutions officer at Endeavor Retirement, said in an email.

“Keeping in mind that the duty with respect to the brokerage window is to prudently select and monitor the service provider for the window and not the underlying investments of the window, this seems like a tough one for the plaintiff,” Treichel said.

The legal team defending American Airlines includes O’Melveny & Myers partners Brian Boyle and Shannon Barrett, who are “probably two of the top Erisa defense attorneys in the country,” said Greg Ash, partner at Spencer Fane.

“Their arguments are spot-on,” Ash said. “This seems to me to be more of a political statement than a real attempt at improving the performance of an Erisa plan. Participants have the ability to choose whatever funds they want — it’s not like they’re being forced into ESG funds. There’s just not much merit in this lawsuit.”

A successful legal challenge to a plan sponsor’s fiduciary obligations in overseeing a brokerage window would have profound consequences for 401(k) plans. If plan sponsors became liable for overseeing the wide range of investments in self-directed brokage accounts — options already used sparingly by 401(k) participants — many would likely eliminate such options.

However, such a challenge is a long shot at best, and the court could dismiss the case without giving the plaintiffs leave to amend the complaint, likely to find plan participants who were actually invested in the funds cited in the lawsuit.

“While we still need to see how plaintiff responds in the next 21 days (or longer with an extension), I expect the court to dismiss the complaint,” Treichel said. “This looks like a case where amendment may be futile and so I expect the court may very well deny leave to amend and dismiss the suit with prejudice.”

In the June complaint, the plaintiff’s attorneys listed numerous mutual funds that they said were ESG-themed, although they did not cite any performance figures for the specific investments. Instead, the lawsuit stated generally that funds that use ESG criteria underperform.

American Airlines pointed to that as a deficiency in the complaint as well.

The plaintiff “does not allege that the options sponsored by these managers have delivered lower returns than other options — or that the options’ performance would have disqualified them on any other financial ground,” the firm’s attorneys wrote in the motion to dismiss. “Indeed, he doesn’t even bother to discuss the financial performance of a single investment option sponsored by a challenged manager.”