Noting that “a fiduciary breach cannot exist where no fiduciary duty applies,” American Airlines has pushed back on a participant-plaintiff’s amended claims regarding ESG-biased investments in his 401(k) plan.
In a motion to dismiss the plaintiff’s amended suit, American Airlines reiterated that the “plaintiff contends that Defendants improperly included in the Plans’ investment lineups so-called ‘Environmental, Social and Governance’ (‘ESG’)-themed funds (‘Challenged Funds’), whose investment strategies allegedly prioritize ESG goals—not just financial performance. Second, he complains that some of the Plans’ funds that pursue only pecuniary objectives are run by managers who allegedly use their proxy voting power in favor of ESG-themed shareholder proposals (‘Challenged Managers’). In advancing these theories, Plaintiff seeks to insert himself into the ongoing, politicized debate over the wisdom of ESG-themed investing.”
Standing Stance
Having said so, they quickly commented that the court didn’t need to concern itself with such politicization—that the “Challenged Fund theory fails at the outset for lack of Article III standing.”
Despite the allegations in the amended complaint that the plaintiff-participant had investments overseen by the investment managers in question, the American Airlines defendants noted that “Plaintiff does not allege that he has invested any portion of his Pilots Plan account in the Challenged Funds he lists in the Amended Complaint. Nor could he, as he has never invested in any of the 25 Challenged Funds. Indeed, it would have been impossible for Plaintiff to find any such ESG-themed investment strategies in the Pilots Plan’s core investment lineup, where he has chosen to invest, because there are none.”
The challenge continued to state that, “even if Plaintiff had invested in a Challenged Fund, his Challenged Fund theory would be dismissible under Federal Rule of Civil Procedure 12(b)(6)”—basically because those options are “accessible exclusively through a self-directed brokerage account (‘SDBA’ or ‘brokerage account’)—a 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 account and choose freely from thousands of mutual funds, exchange-traded funds, and individual stocks at their own risk.”
Brokerage Bounds
Their argument continued by noting that as the plaintiff acknowledged in his original suit, “no fiduciary is responsible for the selection or monitoring of the individual investments within an individual participant’s brokerage account. Indeed, the very purpose of a brokerage account is to free participants from the constraints of a fiduciary-curated investment lineup.” More tellingly, they commented that “a fiduciary breach cannot exist where no fiduciary duty applies, and Plaintiff’s Challenged Fund theory thus would fail even if he had invested in the Challenged Funds.”
They then turned to the second argument—“that the Plan should not be using a broader list of Challenged Managers with allegedly sub-par proxy voting practices even to manage investment strategies that pursue purely pecuniary objectives”—and said that also failed to state a claim. They commented that the plaintiff HAD attempted to patch over the standing problem from the first suit—that he hadn’t invested in any of the challenged options—but “by expanding the list of managers he targets to conveniently include ones involved with options he has personally chosen for his Pilots Plan account.”
Financial Focus
That said, they noted that “he has done nothing to remedy a separate fatal flaw: Plaintiff does not allege any facts sufficient to infer that the unspecified options sponsored by the Challenged Managers are financially inferior to those available from other managers, and thus that a prudent fiduciary would not select them.” They continued by commenting that he had not alleged that those options “had delivered lower returns than other options, or that the options’ performance would have disqualified the managers on any other financial ground; in fact, he doesn’t discuss their financial performance at all,” American Airlines explained.
They go on to note that he also alleged “nothing that remotely permits an inference that Defendants selected the Challenged Managers in an effort to serve their own financial interests or otherwise engaged in acts of disloyalty. It should go without saying that to state a viable federal claim over the financial performance of the Plans’ investment options, he has to plead facts about the performance of those options. Plaintiff says not a single word, and thus fails to state a claim,” they conclude.
Contradiction ‘Call’
American Airlines also pushed back on what they say was a contradiction in the plaintiff’s argument—that fiduciaries would be “duty-bound to avoid funds managed in whole or in part by any of an expanding set of Challenged Managers even if their financial performance is stellar, simply because the managers might lend support to a shareholder ESG proposal through proxy voting.”
Ultimately, the defendants noted that the “plaintiff has limited the investments in his Pilots Plan account to Designated Investment Alternatives in the core lineup. At no time since the beginning of the proposed class period on June 1, 2017, has Plaintiff invested any portion of his account through a brokerage account.” As for the contentions in his amended complaint, American Airlines noted that “from June 1, 2017 through March 14, 2023, Plaintiff invested his entire account in the American Pilot Target Date Fund 2045, one of the custom TDFs constructed by the Committee,” and that since March 15, 2023, Plaintiff has also allocated portions of his account to five of the index fund Designated Investment Alternatives.
Said another way, American Airlines contends:
The plaintiff lacks standing to bring suit because he didn’t actually invest in any of the “Challenged Funds” (and thus suffered no injury).
The Challenged Funds with ESG-themed strategies were not among the Plans’ menu of Designated Investment Alternatives, and the plaintiff cannot sustain a claim with respect to the availability of any individual securities in a brokerage account—including the Challenged Funds—because, as Plaintiff conceded in his Original Complaint, ERISA’s selection and monitoring duties do not apply to investment options available exclusively through a brokerage account.”
“Plaintiff does not include a single, factual allegation showing or even suggesting that Defendants’ decision-making process was somehow flawed. Instead, he asks the Court to infer a deficient process simply because participants were offered the ability to choose investment options that included underlying component strategies managed by the Challenged Managers.”
The plaintiff makes no allegations with regard to actual fund performance.
“Plaintiff rests his Amended Complaint on the misguided assertion that ERISA flatly precludes 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.”
Stay tuned…
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
