Compliance September 14, 2023

American Airlines Asks Judge to Toss 401(k) ESG Complaint

The airline's motion maintains that former pilot has no standing in ESG investing lawsuit, including an amended complaint that sought to expand "the list of managers he targets." 

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American Airlines last week filed a motion to dismiss a lawsuit filed by plaintiff Bryan Spence, requesting the court dismiss with prejudice the amended complaint from the former American pilot who has continued to push for damages from the carrier and its benefits committee for allegedly defaulting him and other participants into underperforming funds that have a focus on environmental, social and governance investing.

American Airlines’ latest motion maintains that Spence does not have standing in Spence v. American Airlines Inc. et al., filed on June 1, in part becuase he was never invested in the funds in question.

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“Plaintiff’s Challenged Fund theory fails at the outset for lack of Article III standing,” the complaint states. “Plaintiff does not allege that he has invested any portion of his Pilots Plan account in the Challenged Funds he lists in the Amended Complaint. Nor could he, as he has never invested in any of the 25 Challenged Funds.”

In an amended complaint from Spence filed in August, the former pilot sought to refute similar arguments made by American Airlines in an earlier motion to dismiss, the docket shows. The amended complaint alleges the defendants improperly included in the plans’ investment lineup ESG-themed funds and that several of the plans’ funds that pursue only pecuniary objectives are run by managers who Spence claims have used their proxy voting power in favor of ESG-themed shareholder proposals.

It also asserts that 37% of Spence’s retirement savings were invested in BlackRock Inc.’s Target Date 2045 fund, which he alleges incorporates ESG factors when selecting investments.

Spence’s second theory underlying his claims—that the plan should not be using a broader list of challenged managers with allegedly sub-par proxy voting practices even to manage investment strategies that pursue purely pecuniary objectives—fails to state a claim, American Airlines’ attorneys argued.

“Plaintiff has patched over the standing problem with his Original Complaint—that he had not invested in any investment options managed by the Challenged Managers—by expanding the list of managers he targets to conveniently include ones involved with options he has personally chosen for his Pilots Plan account,” the motion states. “But he has done nothing to remedy a separate fatal flaw: Plaintiff does not allege any facts sufficient to infer that the unspecified options sponsored by the Challenged Managers are financially inferior to those available from other managers, and thus that a prudent fiduciary would not select them. He likewise alleges nothing that remotely permits an inference that Defendants selected the Challenged Managers in an effort to serve their own financial interests or otherwise engaged in acts of disloyalty.”

American Airlines’ attorneys also argue that Spence did not make a clear argument: “It should go without saying that to state a viable federal claim over the financial performance of the Plans’ investment options, he has to plead facts about the performance of those options. Plaintiff says not a single word, and thus fails to state a claim.”

The initial complaint was filed earlier this year in U.S. District Court for the Northern District of Texas, in the Fort Worth Division.

For the 2021 plan year, the American Airlines Inc. 401(k) Plan held $15 billion in retirement assets for 105,789 participants, and the American Airlines Inc. 401(k) Plan for Pilots held $11 billion in retirement assets for 16,488 participants, according to the latest Form 5500 data filed to the Department of Labor.

American Airlines representatives did not return a request for comment.

Hacker Stephens LLP and Sharp Law LLP represent Spence, while American Airlines is represented by Kelly Hart & Hallman LLP and O’Melveny & Myers LLP.  

Compliance September 13, 2023

Low Birth Rates Are Not the Main Threat to Social Security Insolvency

Income inequality is a greater threat, according to the Social Security Administration’s chief actuary.

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Stephen Goss, the chief actuary of the Social Security Administration, argued that economic setbacks and income inequality were the primary drivers of Social Security’s cash flow deficit.

In remarks made at the 2023 Harkin Retirement Security Symposium, hosted by the Harkin Institute, Goss said Social Security is currently projected to become insolvent by 2034. At that time, benefits will be cut to about 80% “of what is necessary to continue paying full benefits.”  

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If left unaddressed, this cliff could dramatically compromise the financial well-being of many retirees and the retirement planning for workers, according to Goss.

The prevailing narrative on Social Security’s precarity is that it is due to declining birth rates, Goss noted. He then explained that 1980s Social Security reforms, which raised the retirement age, reduced benefits for certain workers receiving public sector pensions and made Social Security earnings taxable, actually anticipated declining birth rates. Costs in the main Social Security Old-Age and Survivors Insurance Trust Fund have exceeded the program’s income including interest since 2021, and about “80% of the shortfall comes from unanticipated economic setbacks,” Goss explained, not from declining birth rates.

These setbacks are the combination of the Great Recession and what he called “dispersion of earnings,” or the concentration of total U.S. wage growth among those earning more than the cap on Social Security taxable income, set at $160,200 for 2023.

Goss explained that “average earnings increased more than expected, but real growth was 62% for the top 6% of workers, while only 17% for the lower 94% of workers” since the 1983 amendments to Social Security were made. This “reduced the share of earnings subject to [the Social Security] payroll tax.”

Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, shared this sentiment later at the conference. Richtman recommended that Congress explore taxing investment income at the same level as wages and/or lifting the cap on wages subject to payroll tax, both of which were also suggested by Goss.

The Social Security Expansion Act, sponsored by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, in February, would create a 12.4% investment income tax on individuals making more than $200,000 to help fund Social Security. It would gradually lift the cap on wages subject to payroll tax until the cap would be fully removed in 2035.

The bill is the only Social Security reform bill proposed this Congress that would keep Social Security solvent for 75 years, according to Goss’s office. Since the bill raises revenue, it must begin in the House of Representatives. It was referred to the House Committee on Ways and Means on February 14 and has not advanced since.

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