The parties in a 401(k) lawsuit regarding lack of access to a stable value fund came to terms – but the federal judge reviewing the $8.8 million settlement doesn’t think it’s enough.
The lawsuit filed in the U.S. District Court for the Northern District of Texas (Ortiz v. Am. Airlines, Inc., 2016 BL 386004, N.D. Tex., No. 4:16-cv-00151-A, 11/18/16) alleged that American Airlines failed to fulfill its obligations as a plan fiduciary by allowing more than $1 billion to be invested in the AA Credit Union Fund (a credit union fund that plaintiffs alleged failed to outpace inflation).
In addition to the monetary settlement, the defendants had also agreed on some “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.”
In the process of negotiating the settlement, Judge McBryde noted that plaintiffs, through their counsel, estimate 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.”
Specifically, he noted that, if participants move half of the approximately $1 billion of their accounts currently invested in the American Airlines Credit Union Demand Deposit Option into the new stable value fund option, participants would earn an additional $10 million per year in investment return, and if participants move 80% of their accounts invested in the American Airlines Credit Union Demand Deposit Option, the increased investment return would equal $16 million per year, resulting in a range of value for the Structural Relief Of $30 million-$48 million for the three-year period following implementation of the structural relief.
The court noted that at this preliminary approval stage, it was limited to determinations as to “whether the court is satisfied that the proposed settlement appears to be the product of serious, informed, non-collusive negotiations, has no obvious deficiencies, and does not improperly grant preferential treatment to class representatives or segments of the class, and that there is good cause to order issuance of notice to the proposed settlement classes of the proposed settlement, and to proceed with a hearing to determine whether the proposed settlement should be approved as being fair, reasonable, and adequate to the members of the proposed classes…”
And while that would seem to be a pretty modest threshold, the court said it had “not been persuaded by the information it has received thus far that there is good cause for entry of such an order or to proceed with such a hearing.”
Judge McBryde noted that using those same per-year numbers employed above, if a stable value fund option had been included as an income-producing, low-risk, liquid fund option, from February 2010 through this date, “the income the Plan participants would have lost by not having access to a stable value fund option would appear to have been between $55 million and $88 million.” Furthermore, he said that, based on the information provided to the court, “if this action were to be pursued through litigation rather than by settlement, such an outcome would appear likely,” and that consequently, “the court does not now have information that would allow it conclude that there is a realistic chance that after a hearing the court would determine that the proposed settlement, which contemplates a payment by defendants of only $8.8 million to certain of the putative class members, should be approved as being fair, reasonable, and adequate to the members of the proposed classes.”