In a case sure to be closely watched by the retirement industry, a senior American Airlines pilot is suing his employer, arguing that the company’s 401(k) plan—one of the largest in the country—picks investments that pursue “leftist political agendas.”
The class action lawsuit was filed last Friday in U.S. District Court for the Northern District of Texas by Bryan P. Spence individually and as a representative of a class of similarly situated persons. It argues that over the past 6 years, the plan has underperformed from the airline choosing to invest in and recommend funds that meet ESG goals, causing him financial harm.
Spence claims the company’s approach is “flatly inconsistent” with its fiduciary responsibility under the Employee Retirement Income Security Act (ERISA).
The lawsuit starts by quoting the opening paragraph from a May 15 editorial in The Wall Street Journal written by Marlo Oaks and Todd Russ—state treasurers of Utah and Oklahoma—which says:
Many American workers don’t realize that their hard-earned money is being used against them. Firms whose job is to deliver investment returns are instead weaponizing retirement funds, public pensions and other investments in pursuit of nakedly ideological goals. It is perhaps the most severe breach of the fiduciary standard in American history.
Spence, who is a veteran American Airlines pilot and also a Lieutenant Colonel in the U.S. Air Force in his 20th year as an F-16 instructor at the Naval Air Station Joint Reserve Base in Fort Worth, Texas, claims American Airlines breached its 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 lawsuit highlights what Spence says are examples of ESG policy, including sustainability efforts, LGBTQ+ interests and racial and gender diversity, as well as executive pay and diversity in leadership.
If allowed to proceed to trial, Spence will call on the court to rule that American Airlines has breached its fiduciary duties under ERISA, and demand that the airline “make good to the Plan all losses that the Plan incurred as a result of their breaches of fiduciary duties, and to restore the Plan to the position it would have been in but for this unlawful conduct,” and further demands injunctive relief to prevent further violations and mismanagement of the plan.
American Airlines’ 401(k) includes approximately 100,000 participants, making it one of the largest in the U.S. with around $26 billion assets, according to the lawsuit.
The case was filed in Texas Northern District Court under case number: 4:2023cv00552.
Gallup finds Americans unmoved by ESG movement
Efforts to promote adoption of ESG framework in investing have gained traction in recent years and have become the subject of pro- and anti-ESG legislation, yet a new Gallup poll finds the general public is no more familiar with ESG today than two years ago.
Thirty-seven percent of Americans currently report being “very” or “somewhat familiar” with ESG, unchanged from 36% in 2021. Another 22% today are “not too familiar,” while 40% are “not familiar at all.”
The findings are from a Gallup poll conducted April 3-25, in which respondents were told that ESG “includes factors like the record of a business on human rights, the environment, diversity or other social values” and that some people take these factors “into account when making decisions about buying products and services or investing.”
Underscoring the public’s lack of familiarity with ESG, nearly six in 10 Americans (59%) take the “no opinion” option when asked if they view “the movement to promote the use of environmental, social and governance, or ESG, factors in business and investing” as a positive or negative development.
When asked whether retirement fund managers should only take financial factors into account when making investment decisions or also consider ESG factors, the public leans toward the former (48% vs. 41%, respectively).
SEE ALSO:
• ‘No ESG in TSP Act’ Reintroduced in Congress
• House GOP Fails to Override Biden ESG Veto
• Coalition of 25 States Sue Biden Administration on ESG Final Rule
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
It’s high time the ESG scam gets taken to court. If you are using ESG schemes to invest your clients’ money (remember it’s your clients money) then you are in direct breach of fiduciary duty.
Diversity in hiring is one way to have a positive impact on closing the racial wealth gap. If this class-action lawsuit succeeds investment management firms will be able to point to this lawsuit as a reason not to pursue diversity in hiring, including investing in companies that are committed to diversity within the boardroom. The benefit of having a 401(K) with a diverse lineup of mutual funds and exchange-traded funds is that employees are able to choose which funds (or models) to invest in. Truth is, employee participants are not required to select a particular fund/diversified model portfolio, as that would constitute a violation of ERISA and the fiduciary obligation of the Plan Sponsor. As an Investment Advisor, I refuse to invest in for-profit prisons because they forecast growth on the basis of future incarcerations. However, I’m not going to file a class-action lawsuit because a company representing the prison industrial complex may be owned by a fund within a 401(K).
#esg #racialwealthgap #diversity #lawsuit #americanairlines #401k
The Plan participant does not have to invest in the ESG fund. This Plan has participant directed plan investment options, The Pilot can elect to save in any fund offered. If he doesn’t like a particular fund’s objective/composition, pick a different fund. I am sure there are disclaimers everywhere on the Plan’s site and in communications. Such as be sure to review the fund prospectuses for specific information about fund objectives, risks, past performance, and associated fees and expenses.
Case closed.
This is SOOOOOO refreshing to see! Financial firms are in business to make their clients money. Not to choose one lifestyle type or another over some other choice. MAKE MONEY. That is the ficuciary responsibility of a financial firm.
A couple of issues. First – take the politics out of it. Don’t make it a political argument.
ESG investing means “focusing” investing in areas that someone is passionate about. It could be investing supporting liberal issues, conservative issues or anything else. Name your cause!
Here are the three reasons it’s a bad approach that increases fiduciary liability.
1) By its very nature, ESG means that one is concentrating investments, therefore causing less diversification in the investing options. The most fundamental fiduciary tenet of any retirement plan is diversification.
2) If you have ESG funds in your 401k – you are going to insult those employees that are not in alignment. Why do that? So that your company can be in the news like A.A.?
3) Public companies especially should stay out of politics. Don’t politicize your 401k plan. This is common sense. Focus on running your business effectively in order to achieve business goals and maximize shareholder value. Do your job!
The only possible exception to all this is an organization that is strongly involved or oriented to a particular cause such as a Christian church that has Christian-friendly funds. If the vast majority of people are working there because they are in alignment with the cause, then offer a set of matching ESG funds. But don’t you dare take away the non-ESG, more highly diversified options, and provide excellent training and reminders to participants about all these options! There should also be absolutely no pressure from company leaders on which set of funds to use.
I should have mentioned that most of the time, long term, ESG funds will perform a little lower than their more highly diversified counterparts – due to a little higher fees (typically) and less diversification. Of course we don’t know the future and this can’t be guaranteed.
If you are hiring someone based on their grandparents ethnic origin, then I do not want you to be in charge of managing client funds. All wealth and income gaps can be overcome through education and fair competition. Encouraging an investment firm to look at the diversity of a company’s staff when it has no direct correlation to a successful outcome is a breach of fiduciary responsibility. I understand and applaud those who seek to invest in truly environmentally conscious companies. On an individual basis, a person can invest their money wherever they see fit. In large group plans, most individuals are not aware of the “default” investments in which their funds are allocated. These plans should place the funds based focused solely on return on investment, unless the individual investor directs otherwise. Those seeking an alternative investment should be made absolutely aware that performance may be lower, should they decide to move to an ESG investment.
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