Key Takeaways to Consider in Wake of American Airlines ESG Opinion

Judge’s recent decision in landmark case gives plenty for plan fiduciaries, sponsors and advisors to think about moving forward
American Airlines ESG case
Image credit: © Inna Kot | Dreamstime.com

In the wake of the landmark opinion issued by the U.S. District Court for the Northern District of Texas Jan. 10 in Spence v. American Airlines, Inc., plan sponsors, fiduciaries and advisors are scrambling to make sense of the various implications of the opinion under ERISA.

The court found that American Airlines did not breach its fiduciary duty of prudence, but breached its fiduciary duty of loyalty by allowing environmental, social, and governance (ESG) considerations to influence the management of its 401(k) plans, even though the selected funds were not explicitly ESG-focused.

The opinion has created considerable confusion, prompting several state officials to demand the federal government clearly regulate ESG investments. Fox Business reported Jan. 29 that state treasurers and auditors from Alaska to South Carolina have written to the acting heads of the Securities and Exchange Commission (SEC) and Department of Labor (DOL) as a result of the Texas court ruling requesting the regulators take decisive action to “uphold fiduciary duty laws and protect retirement plans from activist corrosion.”

As written, the opinion illustrates that it is possible for a plan fiduciary to satisfy its duty of prudence (by meeting prevailing industry standards) but, nevertheless, breach its duty of loyalty by ignoring conflicts of interests between what’s good for the company versus what’s best for plan participants.

The case is a first of its kind in the ongoing debate over ESG initiatives in retirement plan investments. Since the opinion was issued, experts are chiming in to offer some key considerations plan sponsors and fiduciaries need to take note of regarding a variety of issues raised by the case that may significantly change the landscape for ERISA fiduciaries.

4 points from Daniel Aronowitz

Encore Fiduciary's Dan Aronowitz
Encore Fiduciary’s Daniel Aronowitz

On his FidGuru blog, Daniel Aronowitz of Encore Fiduciary posted a piece on Jan. 30 titled, “American Airlines is Collateral Damage in Judicial Backlash Against ESG Investing—Four Thoughts and Recommendations for Plan Sponsors to Consider.”

In it, Aronowitz analyzed four key thoughts plan fiduciaries and advisors need to consider in the wake of this “unprecedented ‘prudent but disloyal’ trial verdict.” Here are his brief summaries of those four thoughts, which it should be noted are each examined in much more detail in his blog post.

1. The Decision Was Wrong and Unfair: American Airlines offered no ESG investments in its retirement plans, had a track record of declining to add ESG investments to company-sponsored plans, and no American Airlines 401(k) plan participant was harmed from any plan investment. If there was any temporary damage to Exxon stock (a tiny component of any S&P index fund) based on BlackRock’s proxy voting, the damage was to every index investor in America. American Airlines is collateral damage in judicial ESG backlash intended for the real culprit, if there is any, which is BlackRock and other investment managers who have pursued public ESG campaigns. This is a case of unfair vicarious liability.

2. There is No ESG Problem in 401(k) Plans: Any concern that this will have a chilling effect on plan fiduciaries in considering ESG investments is overblown and misplaced because most 401(k) plans do not offer ESG investments in the core lineup, or at best offer a single ESG or social choice index fund alternative. The problem is not plan sponsors, who largely avoid ESG. The problem is from investment managers who have spent years trying to curry favor with climate and other “woke” activists.

3. Hold Investment Managers Accountable: If it is now illegal to associate with “woke” investment managers, the key takeaway is that plan sponsors must hold investment managers accountable when they pursue non-pecuniary interests in their investments—even when the plan sponsor does not choose the ESG investment options from the managers investment menu. American Airlines was scapegoated in the fallout from BlackRock’s ESG campaign. If courts are going to find vicarious liability for the mere association with an investment manager who pursues ESG strategies in proxy voting, then the investment managers need to indemnify their clients. Simply put, BlackRock caused the problem, and BlackRock must fix it.

4. Rethink Who Serves on the Fiduciary Plan Committee: Plan sponsors should rethink including finance professionals on the fiduciary plan committee. Finance professionals add value and expertise in managing investments, but this could raise the appearance of potential conflicts if they have corporate business with investment managers.

Read Aronowitz’s complete blog post here.

5 takeaways for plan fiduciaries

Steven Day, Jackson Walker
Steven Day

Texas-based national law firm Jackson Walker recently posted a brief titled, “Texas District Court’s Decision in 401(k) Case Has Wide-Ranging Implications for Plan Fiduciaries,” which outlines five key takeaways from the opinion, written by Partner Steven W. Day and Associate Brian Wilson.

Assuming the court’s holdings survive any appeals, Day and Wilson write that the American Airlines case provides plan fiduciaries with several key takeaways:

Brian Wilson, Jackson Walker
Brian Wilson

• Although no ESG funds were provided in the plans and there was no claim that offering ESG funds in a 401(k) plan is, itself, a fiduciary breach, the opinion specifically states that “ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim,” which would likely prohibit plan fiduciaries from selecting ESG funds as core investment options.

• Despite the fact that American Airlines designated the Employee Benefits Committee to serve as the plan’s fiduciary, the court still held that American Airlines, itself, was a plan fiduciary due to its ability to appoint the Committee members and management’s role in selecting investment managers as well as other plan responsibilities.

• Although the court’s opinion (and trial witnesses) acknowledges that it is not customary for plan fiduciaries to monitor the voting activities of the plan’s investment managers, plan fiduciaries may now feel obligated to monitor such voting activities, review the manager’s voting policies, and/or have the plan retain voting rights in order to avoid similar conflicts of interest.

• Although American Airlines engaged an independent fiduciary, Aon Investments, USA, to assist with the selection and monitoring of investment managers, the court did not believe that it was enough to insulate American Airlines from its obligation to ensure that the managers were acting for the exclusive benefit of the plan participants and solely in their economic interests.

• Given that many large investment managers and index fund providers are also major shareholders of many publicly traded companies, plan sponsors may find themselves in a situation similar to American Airlines and BlackRock, in which an investment manager for the plan is also a major shareholder of the plan sponsor. Plan fiduciaries at publicly traded companies should consider reviewing any potential conflicts of interest with their plans’ investment managers and establish policies and procedures to ensure any conflict of interest does not result in fiduciary decisions that are in the company’s interest but not in the plan participants’ best interest.

Day and Jackson’s brief also provides a summary of the case and the judge’s ruling.

Case background

The case gained instant notoriety upon being filed in June 2023. Senior American Airlines pilot Bryan P. Spence sued American Airlines, arguing that the company’s 401(k) plan—one of the largest in the country—picks investments that pursue “leftist political agendas through environmental, social and governance [‘ESG’] strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants.”

The suit argued that over the past 6 years (dating from 2023), the plan underperformed due to the airline choosing to invest in and recommend funds that meet ESG goals—including sustainability efforts, LGBTQ+ interests, and racial and gender diversity—causing him financial harm. Spence claimed the company’s approach is “flatly inconsistent” with its fiduciary responsibility under ERISA.

Well after a four-day non-jury trial that was held in June 2024, Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas on Jan. 10 ruled that American Airlines breached its fiduciary duty of loyalty under ERISA to make investment decisions based solely on the financial interests of 401(k) plan beneficiaries—but not its fiduciary duty of prudence—in allowing its retirement plan to be influenced by corporate goals unrelated to workers’ best financial interests.

The Court also deferred ruling on the remedies, including the questions of whether injunctive relief is warranted and what damages, if any, are appropriate. Both parties were instructed to submit a cross-supplemental briefing by no later than Friday (Jan. 31, 2025), addressing a handful of considerations.

The industry will be closely watching to see what damages—if any—are awarded in the case. While miminal or no damages could mean American won’t appeal the ruling, significant damages could lead to an appeal and an onslaught of copycat lawsuits.

SEE ALSO:

• Southwest 401(k) Hit with Lawsuit for Underperforming Fund
• Judge Finds American Airlines Liable for ESG Investing in 401(k) Plan
• American Airlines Pilot Sues Company 401(k) Over ‘Woke’ ESG Investing

Brian Anderson Editor
Editor-in-Chief at  | banderson@401kspecialist.com |  + posts

Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.

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