Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
Nov. 21 — American Airlines Inc. agreed to pay $8.8 million to settle claims that it hurt airline workers’ retirement savings by offering a poorly performing credit union fund in its 401(k) plan, but a federal judge is concerned that the deal is too skimpy ( Ortiz v. Am. Airlines, Inc. , 2016 BL 386004, N.D. Tex., No. 4:16-cv-00151-A, 11/18/16 ).
The lawsuit claimed that American Airlines shortchanged workers by allowing more than $1 billion in 401(k) assets to be invested in a credit union fund that failed to outpace inflation, rather than a stable value fund that would provide a higher, guaranteed return. In refusing to bless the proposed deal, the judge said Nov. 18 that $8.8 million may be “inadequate,” because workers may have lost out on as much as $88 million in expected returns over the past six years.
Stable value funds—which are aimed at preserving capital and providing a guaranteed rate of return—are offered by more than 80 percent of large 401(k) plans, according to a 2015 study by Metropolitan Life Insurance Co. In August, a federal judge rejected the novel legal theory that a 401(k) plan fiduciary can be liable under the Employee Retirement Income Security Act for failing to offer a stable value fund. In that case, the judge said that Chevron Corp.'s retirement plan satisfied its legal duties by offering a money market fund, which plan participants challenged as inferior to a stable fund because of its lower return and lack of guaranteed interest rate.
In the American Airlines case, Judge John McBryde of the U.S. District Court for the Northern District of Texas offered some indication of how he would rule if the case went forward without a settlement. After noting that the workers appeared to have lost out on between $55 million and $88 million as a result of the defendants’ conduct, McBryde said that “if this action were to be pursued through litigation rather than by settlement, such an outcome would appear likely.”
McBryde also expressed concern about the rights that workers would be giving up under the proposed settlement agreement. According to McBryde, the settlement shouldn’t include “covenant-not-to-sue language” that is broader than the claims being settled.
Schneider Wallace Cottrell Konecky Wotkyns LLP and Friedman Suder & Cooke PC represent the workers. O’Melveny & Myers LLP and Kelly Hart & Hallman represent American Airlines. Jackson Walker LLP represents the airline’s credit union.
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