American Airlines Faces Pilot’s Class Action For Mismanaging 401(k) Funds With ESG Goals

A class action lawsuit against American Airlines for violating its duties to employees over their 401(k) accounts can move forward. The suit argues that including ESG investment options violates fiduciary obligations, because they prioritize social change over financial returns.

The case revolves around the allegation that American Airlines—headquartered in Fort Worth, Texas—violated its fiduciary obligation to the Employee Retirement Income Security Act (ERISA) “by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue political agendas” through ESG initiatives.

“By pursuing ESG goals, Defendants gave Plan assets to fund managers, such as BlackRock, who allegedly ignored financial returns as the exclusive purpose and lowered the value of Plan participants’ investments,” the order states.

Name plaintiff, Lt. Col. Bryan Spence, argues in the complaint that he’s lost money by investing his 401(k) dollars into suboptimal funds that American had a fiduciary obligation not to include, while those selections supported the airline’s carbon and DEI goals.

American Airlines has fiduciary obligations in selecting investment options for its employees, but it is the employees who choose what to invest in with their 401(k) dollars. This lawsuit is not about the market-based cash balance plan pilots can invest in where they do not make the investment selections.

I find this comic about ESG particularly interesting because it’s both offensively dismissive but also insightful into the cynical approach many companies take towards the issue. Delta Air Lines, for instance, claimed to go carbon neutral but was doing it by buying carbon credits – a dubious enough practice on its own – and some of those credits appear to have been fraudulent.

The problem with this anti-deforestation project was that there was too little deforestation. That seems good? For the climate? But bad for the people hawking carbon credits. The idealistic Muench pointed out the problem, and the now-jaded Heuberger was like “meh still fine”:

ESG funds necessarily earn lower rates of return. Any good investment that an ESG fund makes, a non-ESG fund can also make. ESG funds can’t make the good investments which go against their principles.

So what’s an ESG fund good for? Driving progress on social causes with dollars. The usual mechanism by which this works (note: this is not just virtue signaling!) is by lowering the cost of capital for ‘good’ companies (more investment, more money available and competition to make those funds available) and by raising the cost of capital for ‘bad’ companies (with marginally fewer dollars available to them). However, and this really shouldn’t be controversial:

  • Social investing isn’t a free lunch. If you exclude high return investments from your portfolio that are inconsistent with your guidelines, you will have lower returns. It’s easy to confuse environmental companies delivering good returns – and even the sector outperforming others – with environmental investing not incurring tradeoffs. Non-ESG funds can invest in ESG projects because they are likely to yield strong returns! The only investments that ESG funds can invest in and non-ESG funds won’t are the ones with lower expected returns.

  • ESG investing leads to higher returns for non-ESG investors. That’s by definition, since it leaves profitable opportunities on the table for others rather than competing down those returns. It’s the mathematical flip side of raising the cost of capital for companies you deem bad actors! You should be fine with that, but recognize both that you’re giving up returns and helping raise the returns for other investors who don’t share your philosophy.

  • How many ESG funds actually short non-ESG companies? Most ESG funds do their work badly. If they were serious about raising the cost of capital for non-ESG projects shorting would be a necessary component of the strategy, and possibly even more effective.

  • It can be possible to do more for environmental and social causes by earning more and donating rather than by imposing strict constraints on business activities. Giving up returns gives up the ability to invest in those causes.

There’s enough of an industry practice, enough industry experts who promote these funds, and enough historically strong performance in some of them that the claim the pension is in violation of ERISA law seems… implausible.

I believe it is admirable to invest with your principles, but you shouldn’t believe that you’re getting a free lunch by doing so. It’s admirable because it costs you something!

Oddly, the suit lists funds that ‘pursue ESG objectives’ and just include a laundry list of fund management companies without seeming to understand their investment strategies. They include AQR, for instance, on the ‘bad list’ when its principle is vocal on the tradeoffs involved in ESG investing and pursues strategies like shorts to both improve returns and ESG goals simultaneously though most ESG ratings do not know how to account for this. In other words, they pursue real investing over virtue-signaling even when taking some profit-maximizing opportunities off the table. The suit would probably do better to cite AQR’s own white papers rather than critiquing them.

Ultimately if there’s a case here it’s because of the complexity and ambiguity of ERISA law – offering industry-standard funds through a company like Fidelity is not, in itself, meeting a fiduciary obligation even though it probably should be. Similarly, allowing employees to pick funds which meet both their financial and non-financial goals should be permissible.

Most class actions represent a sort of greenmail, an attempt to extract a settlement. Getting a class certified is one step in obtaining a pecuniary reward. Here, though, the name plaintiff seems most interested in making a point about ESG and against the woke left and that seems entirely unlikely – a judgment on the merits against ESG investing, potentially upending the entirety of the retirement industry, seems exceptionally low probability.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I’d stick to airlines, Scott. This suit is likely going nowhere. Your ROI analysis assumes that all ESG funds are poor performers and that all non ESG funds are great. Stereotyping is the antithesis of good research.

  2. I’d stick to airlines, Gary. This suit is likely going nowhere. Your ROI analysis assumes that all ESG funds are poor performers and that all non ESG funds are great. Stereotyping is the antithesis of good research.

  3. What a pleasure to see a clear analysis of any issue far too many can’t get their head around. You make the essential point: non-ESG funds have all the options of ESG funds, plus some. So much of what you talk about in the ESG context also highlights why the divestment protestors are wasting their time.

  4. Most bond funds massively underperform equities over time. Yet we still get bonds as options. If this were an argument about ESG investing in a pension, I could see it. But for a 401k with reasonable options, this is silly. In the same way that having bonds is more about stability/certainty than absolute return, ESG considers other values than ones that simply try to make the most money. As long as it is an option and not a forced practice, where’s the harm? Of course, ESG funds often have decent long term performance because: 1) stock pickers aren’t able to predict the future (the evidence of portfolio managers being able to consistently beat the market picking equities is dubious, and the likelihood that your 401k has one of those managers is low), and 2) having companies align interests in long-term sustainability or having hiring practices that tap the full potential of their employees usually bodes well for long-term growth. If you have real money to play with, you can find a private fund manager who can use very risky strategies to juice returns — maybe you get the good one rather than the charlatan. But for those of us with a 401k, a basic investing strategy and low fees (mostly through passive funds) is the best we can do.

    The real issue with ESG investing is that the standards are so low for inclusion to be not actually that meaningful.

  5. This confirms that the MAGA/right movement is lying when it says it’s about freedom.

    Here they are once again REDUCING people’s freedom to do what they want.

    Shameful. Don’t fall for their lies.

  6. @Jake…No, I think it confirms you have no clue what the article is about.

  7. If the only options were the non-optimal ones I would agree. But it doesn’t sound like that’s the case. Anyone know?

  8. ESG is the modern day equivalent of purchasing indulgences from the Catholic Church in the dark ages. Both are a scam that defraud the naive and struggling in order to funnel money to those that are wealthy and don’t care about your welfare.

  9. In the long term, it’s hard to say that ESG funds will perform less well than a non-ESG fund. Of course, current performance is explicit, but future performance is, but definition, unknown. If an ESG fund didn’t invest in an opioid manufacturing company which was later sued for harm, they would have avoided the cost of the lawsuits. It’s hard to say whether any of the oil company investments will lose any of the global warming lawsuits, which would affect non-ESG holding funds more than ESG funds. But, such losses are hard to predict.

    I’m not making any predictions on future results, just to point out that there are circumstances where ESG funds could fare better and non-ESG restricted funds. This would make it hard to win such a lawsuit.

  10. Giving an option for an ESG fund that underperforms is not grounds for a lawsuit. Otherwise access to any underperforming fund could be the basis of a suit. Doesn’t sound like anyone was forced to purchase those funds.

    If there had been high demand for the products and services represented by the ESG funds then they might have outperformed other options. That didn’t happen. But there’s not a single person on the planet who can 100% predict the performance of any market.

  11. This suit becomes more comical if one actually checks the facts. As shown below, AMR offers an extremely wide variety of choices for employee 401K including self directed accounts.

    These funds give you a diversified, all-in-one mix of stocks, bonds, short-term investments, and other investment options found individually in Tiers 2 and 3. Each fund is a custom mix, specifically designed just for team members of American Airlines. You choose the fund based on the year closest to the date you expect to retire, and over time, the fund adjusts to grow more conservative as it reaches its target date.

    These funds are clearly labeled by asset class and are designed to track the structure and performance of their associated market index.

    These funds are clearly labeled by asset class and try to outperform — or beat — the returns of their associated market index like the S&P 500.

    Fidelity BrokerageLink® is an account within the 401(k) plan that gives you access to thousands of mutual funds and other investment options beyond those offered in Tiers 1, 2 and 3.

    For employees who prefer to partner with an expert, the plan offers the Professional Management program. When you enroll, the Edelman Financial Engines financial research team researches and analyzes the options available in your plan to create a customized investment strategy. Edelman Financial Engines monitors your portfolio on an ongoing basis, making adjustments as needed to help keep your portfolio properly diversified and on track. There is a management fee for this service.

  12. @Jake

    Another braindead take from our resident commie.

    Esg has failed in investment so badly that even blackrock the company started esg has dropped it.

    Get woke, go broke.

  13. My employer worked with a very well know brokerage house. What was offered in the 401k pool of funds was somewhat mild, but the employer was attempting to avoid extreme options. As an example, cryptocurrency wasn’t on the radar scope at the time, but I would imagine my employer would had avoided them at all cost in today’s environment. Knowing the brokerage house, they would have told my employer “no way”!
    Also, 401k funds are meant for long therm growth and appreciation. Not speculation, day trading, or other wild variations. Also, it’s the discretion of the employer to offer a 401k program. Having worked in payroll, you’d be surprised how many employees pass on the program. Squandered opportunity.
    If the 401k program provided a fair variety of funds, the suit is groundless. It’s just some yahoo thumping his chest to show how stupid he/she/it is. There is a fool born every minute and he/she/it is proof.

  14. I know this can be a challenge to many (and I am not trying to insult—I have decades of teaching things like this—it stumps many). Construct two large groups of investors. Group X can invest in any stock on the major exchanges and Group Y can do any of those except companies that have a stock symbol that begins with a vowel (or any other restriction you want). Over the long run, we expect Group X to do no worse and likely beat Group Y. The former can do everything the latter can do, but not vice versa. Allowing me a proper subset of the options you have may not make me worse, but it can’t make me better off. Obviously, Group Y can do better, but we can only deal in expectations in making policy.

  15. @JW “Your ROI analysis assumes that all ESG funds are poor performers and that all non ESG funds are great.’ Nope, he quite correctly concludes (this is not an assumption; it is a mathematical fact) that removing investment options to make a non-ESG fund into ESG can’t improve prospects and likely hurts them. It does assume that managers of non-ESG funds are no less talented than ESG (I just assumebthem equally talented). Not understanding badic economics is the antithesis of good research.

    Note I talk of prospects. We predict advantages for non-ESG. ESG can outperform, just like I could assemble a portfolio that beats Buffet next year. I would not be expected to do so.

  16. It is nice to see that a self directed brokerage account is available. I do that with my retirement funds.

  17. Scott Adams is a racist. You can’t find a better way to express your point than by quoting him?

  18. Name one thing that liberals haven’t ruined. They are destructive and evil, and should be shown no quarter.

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