In a ruling that could have broad consequences for defined contribution plan management, a federal judge in Fort Worth, Texas, ruled Jan. 10 that American Airlines and its retirement plan fiduciaries violated ERISA’s guidelines by putting corporate interests ahead of participants’ interests due to using ESG factors in their investment decision-making.
This was the first challenge to a DC plan sponsor’s use of environmental, social and governance principles, and the judge’s ruling adds to the efforts by certain politicians and legislatures to claim ESG principles adversely affect retirement plan investments.
A former American Airlines pilot sued the company and plan fiduciaries for two 401(k) plans in June 2023 saying the plans’ doing business with certain investment managers — including BlackRock — violated ERISA due to their investments, proxy voting and other actions that included support of ESG principles.
BlackRock isn’t a defendant in Spence vs. American Airlines et al., which survived two motions to dismiss, and which was the subject of a four-day bench trial.
“The court concludes that the facts compellingly demonstrated that defendants breached their fiduciary duty by failing to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan,” U.S. District Judge Reed O’Connor wrote in his Jan. 10 opinion.
Although Reed said the defendants violated ERISA’s duty of loyalty, he rejected the plaintiff’s argument that the defendants violated ERISA’s duty of prudence, which covers plan’s management process.
“The facts do not compel the same result for the duty of prudence,” the judge wrote. “Defendants acted according to prevailing industry practices, even if leaders in the fiduciary industry contrived to set the standard.”
Even though BlackRock wasn’t a defendant, Reed offered sharp criticism of the firm and its ESG policies while branding as “incestuous” its relationship with American Airlines.
“Defendants knew BlackRock was pursuing ESG initiatives through delegated proxy voting authority and related activism,” the judge wrote.
“Plaintiff demonstrated the problems associated with ESG investing and that such a strategy was not in the best financial interests of the plan,” Reed added. “At a minimum, a loyal fiduciary would have monitored the situation more closely and even questioned BlackRock’s non-pecuniary investment activities."
The judge wrote that the defendants failed to take “sufficient precautions” to avoid conflicts of interest, giving BlackRock “significant authority without adequate scrutiny.”
To O’Connor, “the only reasonable conclusion to draw from the totality of this evidence is that defendants breached the duty of loyalty” under ERISA.
American Airlines and BlackRock couldn't immediately be reached for comment.
American Airlines Inc. 401(k) Plan for Pilots had $10.3 billion in assets, and the American Airlines Inc. 401(k) Plan had $14.7 billion in assets as of Dec. 31, 2022. Both plans are based in Fort Worth, Texas, and the data for both is from the latest Form 5500.
