American Airlines Loses Round Over Mutual Fund Fees

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By Jacklyn Wille

American Airlines Inc. can’t escape a proposed class action challenging the affiliated mutual funds in its 401(k) plan ( Main v. Am. Airlines Inc. , N.D. Tex., No. 4:16-cv-00473-O, 3/31/17 ).

The airline is accused of forcing its employees into expensive, poorly performing mutual funds offered by American Beacon Funds, an investment company that was affiliated with the airline. A federal judge on March 31 refused to dismiss most of the lawsuit’s claims, saying that the employees may be able to show that American acted imprudently and disloyally by filling its 401(k) plan with the disputed funds.

The airline, through its alleged relationship with American Beacon, got swept up in a major litigation push against companies that put affiliated financial products in their 401(k) plans. At least 20 companies, including Morgan Stanley, Wells Fargo and Charles Schwab Corp., have been sued over this practice in the past three years. So far, judges have sided with the investors by refusing to dismiss cases against BB&T Corp., Allianz, Deutsche Bank and others.

In this case, the American Airlines employees argued that the company chose affiliated investment options that both underperformed and charged higher fees than funds available from competitors. Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas found these allegations sufficient to state a claim for fiduciary disloyalty under ERISA.

The employees also advanced a fiduciary imprudence claim. That’s because they argued that the company failed to consider cheaper alternatives to the American Beacon funds and retained specific actively managed funds that allegedly performed poorly, O’Connor said.

However, O’Connor agreed to dismiss one claim against the airline: the claim that it failed to consider low-cost separate accounts and collective trusts as alternatives to mutual funds. Citing a 2011 decision by the U.S. Court of Appeals for the Seventh Circuit, O’Connor said that ERISA fiduciaries aren’t imprudent merely by failing to consider these low-cost alternatives. Similar claims have been raised against M&T Bank Corp. and Chevron Corp., the latter of which successfully argued for dismissal.

O’Connor refused to dismiss claims that the airline failed to monitor and evaluate the performance of the plan’s other fiduciaries. However, O’Connor said that the Fifth Circuit—which has appellate authority over the Northern District of Texas—hasn’t determined whether such claims are viable. He ordered the parties to submit briefs on this issue.

The American Airlines 401(k) plan is one of the largest in the country, with nearly 85,000 participants and more than $7 billion in assets as of 2015, according to the most recently available government data.

Nichols Kaster PLLP and Kendall Law Group LLP represent the employees. O’Melveny & Myers LLP and Kelly Hart & Hallman represent the airline. Jackson Walker LLP represents American Beacon.

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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