On January 10, 2025, the U.S. District Court for the Northern District of Texas issued an opinion in Spence v. Am. Airlines, Inc. (N.D. Tex. Jan. 10, 2025) holding that fiduciaries of two American Airlines 401(k) plans breached their duty of loyalty by failing to monitor, evaluate and address the potential impact of a third-party investment manager’s (BlackRock Institutional Trust Company, Inc. (BlackRock)) use of shares held in the plans’ index funds as part of BlackRock’s well-publicized shareholder voting campaign to promote Environmental, Social and Governance (ESG) initiatives. The court held that the fiduciaries harmed participants by allowing BlackRock to use plan assets to pursue socio-political outcomes rather than financial returns exclusively. In addition, the court held that due to American Airlines and BlackRock’s relationships outside of the 401(k) plans, plan fiduciaries breached their duty of loyalty by putting American Airlines’ corporate interests ahead of the interests of plan participants.
Although the case is a milestone and first of its kind in the ongoing political debate over ESG initiatives in retirement plan investments, plan sponsors and fiduciaries should take note of several other issues raised by the case that may significantly change the landscape for ERISA fiduciaries.
Background
In June 2023, an American Airlines pilot and participant in one of American Airlines’ 401(k) plans filed a class action lawsuit against both American Airlines and its Employee Benefits Committee (EBC), alleging they violated their fiduciary duties of prudence and loyalty under ERISA by retaining and failing to monitor BlackRock as a third-party investment manager in the midst of BlackRock’s well-publicized campaign to use its shareholder voting power in publicly held companies to promote pro-ESG initiatives. At the heart of the complaint were two key accusations:
- Breach of Prudence: The plaintiff argued that the defendants imprudently selected and retained an investment manager whose ESG-focused proxy voting and shareholder engagement detrimentally impacted plan performance.
- Breach of Loyalty: The plaintiff argued that American Airlines prioritized its corporate interests over participant benefits, citing BlackRock’s significant ownership of American Airlines’ common shares and fixed income debt.
Although the American Airlines 401(k) plans did not hold any funds specifically dedicated to ESG investing, the plaintiff argued that the plan fiduciaries allowed BlackRock to use plan assets, via its shareholder voting campaigns, to pursue socio-political goals rather than purely financial returns. BlackRock was not a named party in the case.
The Court’s Ruling
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Duty of Prudence
Plaintiff’s claim that the plan fiduciaries breached their duty of prudence hinged on whether their procedures for selecting and monitoring BlackRock were in line with prevailing industry standards, which the court acknowledged is an objective test. The court held that the plan fiduciaries fulfilled their duty of prudence by maintaining robust processes for selecting and monitoring investment managers, such as holding periodic reviews, engaging outside advisors to assist with selection and monitoring, and using objective metrics in their review of investment managers.
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Duty of Loyalty
Plaintiff’s claim that the plan fiduciaries breached their duty of loyalty hinged on whether or not the fiduciaries acted “solely in the interest of the participants and beneficiaries” and “for the exclusive purpose” of providing financial benefits. The court emphasized that loyalty demands the exclusion of any corporate or third-party interests. In addition, fiduciaries must act solely in the best financial interests of participants and not pursue non-pecuniary objectives, regardless of their perceived nobility.
The court focused on the fact that BlackRock owned 5% of American Airlines’ common shares as well as $400 million in American Airlines’ fixed income debt. Although BlackRock’s ownership of American Airlines securities presents an inherent conflict of interest among the parties, the court acknowledged that such a conflict of interest does not automatically result in a breach of fiduciary duty so long as fiduciaries are able to ignore corporate interests when making decisions related to the plan. Nevertheless, the court found that the plan fiduciaries did not, in fact, ignore American Airlines’ corporate interests. Plaintiff provided evidence that the plan fiduciaries discussed the fact that American Airlines, as a large consumer of fossil fuels, was at risk of a proxy fight with BlackRock, given BlackRock’s significant ownership position. The court concluded that plan fiduciaries believed that not interfering with BlackRock’s use of plan assets in its ESG voting campaigns would benefit the corporation, without considering the potential harm to plan participants. Moreover, the plan fiduciaries, who were aware of BlackRock’s ESG proxy voting and related ESG activities, did nothing to prevent BlackRock from acting against the interests of the plans’ participants.
Key Take-Aways for Plan Fiduciaries
Assuming the court’s holdings survive any appeals, the American Airlines case provides plan fiduciaries with several key takeaways:
- 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. As the American Airlines case illustrates, it is possible for a plan fiduciary to satisfy its duty of prudence (i.e., 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.
