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AA (Finally) Comes Out a Winner in 401(k) Suit

Fiduciary Rules and Practices
A 4½-year-old suit regarding the lack of a stable value alternative—where a judge once ruled that an $8.8 million settlement was insufficient—has been decided in favor of the plan fiduciaries.
 
According to U.S. District Judge John McBryde’s recitation of the case background, the American Airlines 401(k) plan was intended to comply with ERISA § 404(c), and in order to do so, was required to offer, as one of one of the investment options that must be provided to the participants of such a plan, was an “income-producing, low-risk, liquid fund.” For that alternative, the plan fiduciaries the AA Credit Union Fund, a fund that wound up with $1 billion invested there.
 
In May 2016, the defendants moved to dismiss, followed in July of that year by the filing of a settlement offer of some $8.8 million and “structural relief,” specifically to retain the services of “an unaffiliated investment consultant to assist the American Airlines Pension Asset Administration Committee or its successor in selection of an appropriate ‘stable value fund’ which, for this purpose, shall be defined as a designated investment alternative in the Plan that will provide capital preservation, liquidity, and steady, positive returns that are expected to exceed the returns of money market investments over time.”
Un ‘Settled’
 
That proposed settlement was soundly rejected in December 2016, when this same Judge McBryde noted that plaintiffs, through their counsel, had estimated that the future monetary value to plan participants of the ‘structural relief’ described above “is between $30,000,000 to $48,000,000 for the three-year [period] following the implementation of the Structural Relief, based on certain assumptions.” In fact, in the new decision, Judge McBryde recalls that “In their efforts to persuade the court to approve the settlement, plaintiffs and their counsel so convinced the court of the merit of plaintiffs’ claims on behalf of the class that the court concluded, among its concerns relative to the terms of the proposed settlement, that the amount to be received by the settlement class was not sufficient.” 
 
You can get a sense of where this is all going with Judge McBryde’s statement that “the court has had, and defendants have expressed, uncertainty concerning the exact nature of the claims that are being asserted by plaintiffs, which were not resolved until plaintiffs clearly defined their claims in a document they filed November 12, 2019.”
 
More than half of the 40-page ruling is devoted to retracing a series of steps, resteps, filings, refilings, motions, countermotions, and such along the way before getting to the analysis of the motion for summary judgment by the defendants.
 
The Analysis
 
Judge McBryde quickly dismissed claims that the plaintiffs’ case was barred by ERISA’s 6-year statute of limitations, agreeing with the plaintiffs that the defendants “have had such an ongoing and continuing fiduciary obligation, and that the time-bar ground is without merit.”
 
The defendants here had also challenged that the plaintiffs had standing to bring suit. Now the plaintiffs allege that they could have earned better returns had American and the Committee selected a stable value fund instead of the AA Credit Union Fund option as the prudent choice for investments in the plan. However, Judge McBryde noted that the “plaintiffs cannot establish that American and Committee were required to select a stable value fund instead of the AA Credit Union Fund option. But, even if they could, their alleged injuries are at best speculative, not concrete.”
 
Moreover, Judge McBryde goes on to point out not only that the plan provides that participants are responsible for making investment decisions, but that the plaintiffs “…do not point to any evidence showing that they would have chosen the stable value fund for their investments.” Rather, he notes that the “evidence reflects that Ortiz never took even basic steps to evaluate the stable value fund as an investment option when it became available,” and that plaintiff Scott “chose not to invest in a stable value fund when he had the option to do so.” All in all, he concluded that “Plaintiffs have not established standing to pursue the claim regarding an alternative capital preservation option.”
 
Breach ‘Teaching’
 
On the issue of an ERISA fiduciary breach, citing several court precedents, Judge McBryde reminds us that “a fiduciary is required to act with prudence, not prescience,” that a fiduciary “must engage in a reasoned decision-making process for investigating the merits of investment options, ensuring that each one remains in the best interest of plan participants,” and that in order to “sustain their claim, plaintiffs must show a breach of duty and loss to the Plan. 
 
“Plaintiffs seem to think it sufficient to show that American and Committee failed to engage in a reasoned decision-making process,” McBryde wrote, cautioning that “…procedural lapses alone, assuming plaintiffs could establish any, are insufficient. Plaintiffs must show that the procedural failings led to Plan losses.” He then takes this further by noting that “in this case, plaintiffs contend that the AA Credit Union Fund should not have been offered at all by the Plan; hence, they must establish that no reasonable fiduciary would have included such Fund in the Plan.” 
 
On the latter point, Judge McBryde found little support, noting that “the opinion of their expert Mr. King that a stable value fund was a comparable, better-performing principal preservation alternative to the AA Credit Union Fund does not suffice,” and that while the plaintiffs “complain that the interest rate on the AA Credit Union Fund was ‘abysmally low,’” that “making a bare allegation does not mean anything without a meaningful benchmark.”
 
That said, he continues by explaining that “plaintiffs do not point to any similar demand deposit funds to show that they earned a better rate of return,” but that they instead “rely on a comparison to stable value funds, even though their expert admits that the two investment options have different characteristics”—going on to characterize the two as “by definition, these are apples and oranges.”
 
Judge McBryde found similar deficiencies in the arguments presented alleging that the Credit Union was betraying its fiduciary duties, or that it engaged in self-dealing, basically pointing out that it was insufficient to merely allege such things as true. 
 
Having determined that the plaintiffs had failed to make their case, Judge McBryde ordered in favor of the defendants’ motions for summary judgment—“that plaintiffs take nothing on their claims against defendants; and that plaintiffs' claims be, and are hereby, dismissed with prejudice.”
 
What This Means
 
Here you have a case that was well on its way to being settled, only to have that proposed settlement rejected—and then several years later have the case tossed by the same judge who had deemed as insufficient the financial terms of the proposed settlement. At first glance it seems a bit of a head-scratcher; however, it’s worth remembering that the standard applied in assessing the adequacy of a proposed settlement is different that that applied to a motion to dismiss a case for failure to establish a claim. 
 
However, a read of the case history—provided in some detail by Judge McBryde here—chronicles a fair amount of (apparent) frustration with the cases presented, the contributions of the expert witnesses, and the multiple opportunities provided for the parties to remedy evidentiary shortfalls put forth. Even though the judge appeared to be sympathetic to the arguments made, ultimately, it seems—the “proof” lies in the “putting.”