American Airlines Inks $22M Deal in 401(k) Funds Challenge

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

American Airlines Inc. agreed to a $22 million settlement in a lawsuit claiming it drained its employees’ retirement savings by filling its 401(k) plan with expensive funds that earned fees for an affiliated entity ( Main v. Am. Airlines, Inc. , N.D. Tex., No. 4:16-cv-00473-O, motion for preliminary settlement approval filed 7/7/17 ).

The proposed class action targeted the American Beacon funds in the airline’s 401(k) plan, which participants said were overly expensive and “complete failures in the marketplace.” These funds earned fees for the airline’s corporate family and caused the plan to lose tens of millions of dollars in excessive fees and lost earnings, the lawsuit alleged. All American Beacon funds were removed from the airline’s 401(k) plan in 2015, shortly after the airline’s parent company sold its interest in American Beacon, according to the lawsuit.

This $22 million deal—announced in court papers filed July 7—dwarfs recent settlements in lawsuits against employers that include affiliated investment funds in their 401(k) plans. Principal Life and New York Life settled similar claims for $3 million each, and TIAA agreed to a $5 million deal earlier this year. Similar claims are pending against JPMorgan Chase Bank, Charles Schwab Corp., and Morgan Stanley, and judges have refused to dismiss cases against BB&T Corp., Allianz, Deutsche Bank, Franklin Resources, American Century, and Edward Jones.

The $22 million settlement amount—which the airline and American Beacon are collectively responsible for paying—was suggested by a mediator after the parties couldn’t come to an agreement during a full-day court-ordered mediation session, the papers indicate. The amount is more than 62 percent of American Beacon’s estimated revenues associated with the funds during the period in question, and it’s nearly 100 percent of the difference between the American Beacon funds and the funds that ultimately replaced them, according to the settlement papers.

The deal is expected to benefit about 103,000 individuals who held retirement savings in American Airlines’ 401(k) plan, according to court papers. Attorneys for the plan participants are allowed to seek up to 30 percent of the settlement amount as attorneys’ fees.

A spokesman for American Airlines told Bloomberg BNA the company was pleased to have reached this settlement but declined to comment further.

Carl F. Engstrom, an associate with Nichols Kaster in Minneapolis and counsel for the plan participants, also said he was pleased to have reached this deal, which he called fair and reasonable for the participants. He too declined to comment further.

The case is pending before Judge Reed C. O’Connor in the U.S. District Court for the Northern District of Texas. The settlement must receive judicial approval before becoming final.

Nichols Kaster PLLP, Cunningham Swaim LLP, and Kendall Law Group LLP represent the plan participants. O’Melveny & Myers LLP and Kelly Hart & Hallman represent American Airlines.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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