The 2016 Innovators

2016 INDUSTRY INNOVATION AWARDS

Defined Contribution

American Airlines

Ken Menezes, Managing Director of Treasury & Asset Management
Fort Worth, Texas
Art by Thomas Fuchs

When American Airlines and US Airways merged in 2013, creating the world’s largest airline, Ken Menezes’ job responsibilities changed drastically. The $11 billion deal meant the two carriers’ six separate 401(k) plans were also consolidating—producing a combined pool of nearly $13 billion.

The last three years of his now decade-long tenure at American Airlines were spent not only integrating those six individual plans, but also improving the overall defined contribution (DC) offering—and innovating it entirely.

“The 401(k) plans originally had mutual fund lineups,” Menezes tells CIO. “But they offered too many options to employees—some even offered five to six large-cap growth options per plan. I believe that too many choices can freeze people from moving and making decisions. We saw an opportunity to streamline, innovate, and create a program to make it easier for employees to save.”

And streamline they did. Now with a united DC plan of $13 billion, Menezes and his team cleaned up the glutted mutual fund selection and moved to create two custom-only lineups: one for pilots and one for all other employees at American Airlines.

The fee structure for legacy mutual fund options had already been relatively low, he adds, so the majority of the focus went to simplifying the decision-making process for the employees. So instead of numerous options per asset class in the investment menu, the restructured program consisted of one fund per asset class made up of multiple managers.

The end result? American Airlines changed record keepers to Fidelity in 2014, created a fourtiered program—consisting of custom targetdate funds (TDF), low-fee index funds, actively managed funds by asset class, and brokerage accounts–and Menezes was able to negotiate custom fees.

Menezes and American Airlines’ DC innovation is especially highlighted in the way they structured custom TDFs specifically for pilots. Because pilots are mandated by federal law to retire by the age of 65, this particular program needed a bespoke glidepath based on this demographic—one that is more aggressive and de-risks faster than the industry-standard glidepath.

All of these changes and transitions didn’t happen overnight, however. Over the two years beginning in late 2013 when American Airlines implemented the new lineup, Menezes also focused on communicating the changes to the employees. “It’s important to give employees time to get used to the new record keeper, the new portal, and the new investment menu,” he explains. “There was a concerted effort to deliberately communicate the new features to our participants. We wanted to be clear on when the accounts were being transferred, what the new options were, and how they can re-enroll into the new plans.”

Soon after having smoothly revamped the DC plan, Menezes is already looking forward– “it’s a constant evolution,” he says. Next steps for American Airlines include introducing lifetime income strategies through target-date funds, much like another DC champion, United Technologies. “I’m looking forward to it.”

Sage Um

 

Defined Contribution Finalists

  1. Caterpillar

    (Jill Harlan)
  2. Microsoft

    (Fred Thiele)
  3. Nestlé

    (Karin Brodbeck)
  4. University of California Regents

    (Jagdeep Bachher)
 
  1. Foundation
  2. Public Defined
    Benefit Plan
    $15b to $100b
  1. Endowment
  2. Public Defined
    Benefit Plan
    Above $100b
  1. Corporate Defined
    Benefit Pension Plan
    Below $5b
  2. Health Care
  1. Corporate Defined
    Benefit Pension Plan
    Above $5b
  2. Defined Contribution
  1. Public Defined
    Benefit Plan
    Below $15b