Defined Contribution

How American Airlines
combined two mega DC plans

BlackRock |Dec 18, 2019

When companies merge, what effect does it have on their participants’ financial futures and retirement planning? See how American Airlines’ merger with U.S. Airways resulted in a simplified, yet customizable investment menu that suited a broad range of employee preferences.

American Airlines was undergoing a multi-billion dollar merger with its partner, U.S. Airways, in late 2013. In joining forces, the two big airlines were working to integrate across all functional areas. “This meant one reservation system and one human resources department,” said Ken Menezes, Managing Director of Treasury, Asset Management, at American Airlines. “It also meant streamlining multiple defined contribution (DC) plans at each legacy airline servicing 120,000 participants.”

American Airlines wanted more than simply to combine legacy plans. They wanted to simplify investment options while still providing a menu that would accommodate a range of employee investing styles and preferences. Fully aware that the combined plan would be a high profile touchpoint for every single employee, the focus was consolidation, customization and greater simplicity for participants.

“We wanted to create a plan that would make our employees feel confident about saving for retirement,” Menezes said. “We didn’t think of this as something just happening in the 401(k) space. It’s being felt across the rest of the business with respect to integrating the operations of the two airlines.”

The legacy landscape

Post-merger, American Airlines was faced with combining five legacy plans, each with a traditional menu of around 25 to 30 investment options, a range of vehicle types and different recordkeeping platforms. Merging the various menus not only meant streamlining all of the above, but also improving the participant investment experience.

“We were thinking about the objectives of the new investment lineup and what we really wanted to achieve,” Menezes said. “Not just merging the two together and calling it a day.”

“We wanted to simplify the selection process for participants. With this investment menu, employees would be able to focus more on savings versus which investment option to choose,” Menezes said. The end result, a four-tiered investment menu, would eventually accommodate a custom target date suite (one for pilots and another for non-pilots), a suite of index-only funds mostly managed by BlackRock, white-labeled actively managed options, self-directed brokerage services and a managed account option.

American Airlines recognized the complexity of the undertaking. Menezes and the team wanted to focus on the broader goals they had established. That’s why they selected BlackRock’s Transitions Management (TRIM) team to manage the complex asset transfer to the new investment lineup from start to finish.

Managing the asset transfer

The first order of business for the BlackRock TRIM team was to analyze the transfer of assets from the legacy strategies into the new solutions. Given the sheer number of managers being terminated, there would be a range of different constraints, requirements and levels of transparency. The asset size was large and would require multiple trade dates depending on security, market liquidity and legacy vehicle type.

“Some legacy managers wanted to give us cash, some wanted to give us securities,” said Rajeev Ghia, a Director on the TRIM team. “We wanted to go with the least costly, most effective option.”

In instances where securities could be efficiently matched between the legacy and new funds, and the legacy manager agreed to transfer the assets in kind to the new manager, the TRIM team was able to avoid exposure to real world trading with its expense and potential for adverse price movements.

If securities could not be matched and legacy managers could afford to provide cash rather than securities, BlackRock allowed cash transfers to move directly into some of its products as index fund provider for the new lineup. These transfers caused no material impact to the funds, and American Airlines benefited from the reduced transaction costs. In instances where the securities could not be matched and the manager could not provide cash, the securities were traded – and costs isolated – in a transition account.

In situations where international securities needed to be traded, fair value pricing was used and special instructions taken to protect the performance of the impacted funds into which American Airlines' participants (among many other clients) would enter.

Maintaining participant liquidity

Because market liquidity prevented the transition from occurring in one single day, the team took into consideration special circumstances in order to accommodate daily participant trading – a “must have” in the defined contribution marketplace.

“More than half of our assets were in cash,” TRIM’s Ghia said, “but we had to be tactical where we deployed it.” By monitoring what products employees transacted in most on a daily basis, the TRIM team created a liquidity hierarchy through which they would prepare for daily trades.

“We stacked up certain funds that we expected to have greater participant activity with a minimum amount of cash on day one, so that daily trades could be accommodated.”

A one-day freeze on participant elections did take place prior to initial trade date, however DC participants remained in the market throughout the entire multi-billion dollar transition— a metric that remains key to any plan driven change.

And although Ghia did stress the importance of size, scale and experience as key factors which allowed his team to achieve liquidity and maximize cost effectiveness, he noted that above all else the “secret sauce” in a complex move like this was preparedness.

“The TRIM team had backup plans for every possible outcome,” Ghia said. “We were able to forecast potential challenges and compensate for anything that came along the way. Things like, ‘what if we didn’t get the money on time’ were top of mind.”

When assets began to move on October 30, 2015, from legacy investment managers into tiers of the carefully crafted American Airlines 401(k) Plan, BlackRock’s experience and flexibility provided a sense of comfort throughout a complex process, according to Menezes.

Craig Bellarosa, Head of DC Product Implementation, added, “When we are involved in complex transitions, we have the toolbox to assemble an impactful solution. We’ve also been through quite a few transitions and know how to focus on delivering results.”

Satisfaction, results,
and commentary

With the TRIM team handling the asset transfer, the American Airlines team was able to concentrate on successfully introducing their new, simplified plan. Menezes was pleased that a very high percentage of participants actively elected their investment options through the company’s selective reenrollment process. Over 70,000 participants visited the website, which was more than he expected. “The common thread here was that participants like a streamlined investment menu and the key to participant engagement is frequent and tailored communication,” Menezes said, in assessing the new white-labeled structure.

As for the overall process, Menezes added that it is hard to imagine working through a transition like this one alone. “Having an ally like BlackRock helps a whole lot in the process,” he said. “The TRIM team is above and beyond.”