Plan fiduciaries say that a suit brought by a participant alleging a breach of fiduciary duty by a plan that included ESG options on its menu—and funds managed by ESG-friendly managers—didn’t invest in those options and has no basis for the suit.
Participant-plaintiff (and pilot) Bryan P. Spence filed suit in the U.S. District Court for the Northern District of Texas in June against Defendants American Airlines, Inc., American Airlines Employee Benefits Committee, Fidelity Investments Institutional, and Financial Engines Advisors, LLC (he subsequently dropped the latter two), alleging that they “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (‘ESG’) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants.”
The suit had also challenged “the unlawful decision to pursue unrelated policy goals over the financial health of the Plan is not only flatly inconsistent with Defendants’ fiduciary responsibilities, but it also jeopardizes the retirement security of hundreds of thousands of American Airlines employees.”
The Motion
Pushing back on that suit, the ubiquitous motion to dismiss (Spence v. American Airlines Inc., case number 4:23-cv-00552, in the U.S. District Court for the Northern District of Texas) the suit filed by the American Airlines defendants says that the plaintiff “seeks to insert himself into the ongoing, politicized debate over the wisdom of ESG-themed investing,” going on to comment that “But this is a case without a controversy.”
“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.”
And there turns out to be a reason for that, the motion continues. “Indeed, it would have been impossible for Plaintiff to find any such investment options in the Plans’ core investment lineup, where he has chosen to invest, because there are none. Rather, the Challenged Funds and investment options by the Challenged Managers are available to participants exclusively through a self-directed brokerage account (‘SDBA’)—a Plan feature that enables those participants who do not wish to be restricted to the investment options selected by the Plans’ fiduciaries to instead open their own brokerage accounts and choose freely from thousands of mutual funds, exchange-traded funds, and individual stocks at their own risk.”
‘Never’ Land
More than that, the motion notes that “Plaintiff has never opted for a brokerage account at all, much less navigated through the countless investment options accessible through it to find and invest in the ones he now challenges. Plaintiff’s lack of standing warrants dismissal of the Complaint in its entirety. Plaintiff’s failure—indeed, his inability—to allege that there are ESG Funds or options sponsored by the Challenged Managers in the Plans’ core lineups (as opposed to the brokerage window) requires dismissal on the merits as well. Plaintiff expressly concedes that Plan officials had fiduciary selection and monitoring responsibilities only for those core menu options (the so-called ‘Designated Investment Alternatives’), and that there were no such obligations with respect to any of the multitude of options that are available through a self-directed brokerage account. Only by expressly alleging that the options he challenges were included in the core lineup would Plaintiff be able to state a claim under his theories—and Plaintiff does not do so.”
So, by now you see that the argument is basically that the individual filing suit wasn’t invested (and thus wasn’t injured) in the funds in question—an argument that some, though not all, federal district courts have accepted as a necessary element in order to bring suit.
As for the complaint regarding proxy-voting, the defendants state that the plaintiff “does not allege any facts sufficient to infer that the unspecified options sponsored by Challenged Managers are financially inferior to those available from other managers.” Indeed, they comment that the plaintiff’s arguments are “backwards,” in that “he suggests that Defendants would be duty-bound to avoid funds sponsored by the Challenged Managers even if their financial performance was stellar, simply because the managers might use portfolio shares to lend support to a shareholder ESG proposal.”
Anti-ESG Alternatives Also Available
Ultimately, the motion notes that “participants have only been able to invest in these options by going off the Plans’ menu of Designated Investment Alternatives and opening a self-directed brokerage account at Fidelity Investments”—and option they say “affords those participants who do not wish to be restricted to the curated set of Designated Investment Alternatives chosen by the Plans’ fiduciaries with the freedom to access the broader securities markets through a traditional brokerage account.”[1] The motion notes that “Participants can also invest in funds that describe themselves as ‘anti-ESG funds,’ including, for example, the Strive US Energy fund (with ticker ‘DRLL’), which invests exclusively in securities of oil, gas, and energy companies, and the AdvisorShares TR Vice ETF, which invests exclusively in ‘vice’ industries like alcohol, tobacco, and gambling companies.”
Even so, the motion states that “at no time since the beginning of the proposed class period on June 1, 2017 has Plaintiff invested any portion of his account through the brokerage window, and thus at no time during the proposed class period has he invested his account in any of the Challenged Funds.” It goes on to state that neither had he “invested in a non-ESG investment option that is sponsored by one of the Challenged Managers to which Plaintiff attributes an ESG-oriented proxy-voting practice; in fact, as explained, none of the Plans’ Designated Investment Alternatives is sponsored by any such manager.”
Rather, where the plaintiff did put his money—his entire account, in fact according to the motion—was the American Pilot Target Date Fund 2045, “one of the custom TDFs constructed by the Committee.” They go on to note that “since March 15, 2023, Plaintiff has also allocated portions of his account to five of the index fund Designated Investment Alternatives that invest solely in collective investment trusts managed by BlackRock.”
“Plaintiff includes no allegations showing that Defendants’ decision-making process was flawed. Instead, he asks the Court to infer a deficient process from the mere fact that participants were offered the ability to choose products sponsored by the Challenged Managers as investment options.”
Performance Prudence?
Beyond that, the suit “does not even mention the financial performance of any Designated Investment Alternative in the Plans’ menus—relative to the option’s investment benchmarks, relative to peer funds with the same or similar investment strategy, or otherwise. Indeed, Plaintiff says absolutely nothing about the performance of any of the products offered by the Challenged Managers, whether supposedly among the Plans’ Designated Investment Alternatives or not—much less try to connect the dots between specific proxy votes on shareholder resolutions he disfavors and the financial performance of the companies in the managers’ portfolios, or, in turn, the performance of the portfolios themselves relative to alternative products the Committee might have chosen.”
“In sum,” the motion concludes, “Plaintiff offers no basis to conclude that a prudent and loyal fiduciary selecting investments based solely on their financial performance would have avoided each and every investment product offered by the Challenged Managers. Instead, Plaintiff rests his Complaint on the assertion that ERISA flatly precludes Plan fiduciaries from considering investment products offered by any manager who has ever cast a proxy vote for an ESG-based policy regardless of how those products have performed, and regardless of the fiduciaries’ judgment as to their prospects for future performance.”
This, they argue “is as wrongheaded as it sounds. Acceptance of Plaintiff’s theory would compel ERISA fiduciaries to ignore actual investment performance and instead screen out investment options ‘based on non-pecuniary factors’ (i.e., the manager’s proxy voting record), potentially harming participants by depriving them of access to some of the best performing, most popular, and highest rated funds on the market. This is the exact practice that Plaintiff insists is forbidden by ERISA.”
Now we’ll see what the court has to say on the matter.
Footnote
[1] The motion notes that at “the end of the first quarter of 2023, participants in the Pilots 401(k) Plan were invested in over 2,000 different mutual funds or exchange-traded funds representing more than 200 different investment management firms, including more than 145 distinct funds offered by Vanguard—the firm that Plaintiff lauds for not pursuing ESG goals…”
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