On January 10, 2025, the U.S. District Court for the Northern District of Texas issued an opinion in Spence v. American Airlines, Inc. (N.D. Tex. Jan. 10, 2025) holding that fiduciaries of two American Airlines 401(k) plans (1) did not breach their fiduciary duty of prudence by following standard industry practice of outsourcing proxy voting to Aon and Blackrock, but (2) nevertheless breached their duty of loyalty for failing to stop BlackRock from voting for dissident directors in a 2021 Exxon proxy vote. This blogpost analyzes what plan fiduciaries and advisers need to consider in the wake of this unprecedented “prudent but disloyal” trial verdict. We have four key thoughts:
- (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 401k 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 401k Plans: Any concern that this will have a chilling effect on plan fiduciaries in considering ESG investments is overblown and misplaced because most 401k 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.
KEY POINT #1: The American Airlines ESG trial verdict is flawed because there is no proof of causation that any plan participant was harmed by purported “covert ESG” index funds, and certainly no damages. The trial decision is a political statement designed to ridicule BlackRock for its prior ESG postures.
The American Airlines trial decision finding of no breach of prudence, but breach of loyalty for the same conduct is unprecedented. It is hard to understand how conduct the meets the prudence standard is somehow disloyal. American Airlines fiduciaries outsourced their proxy voting to BlackRock in a fiduciary capacity. Given that there are over 160,000 proxy votes a year, American Airlines did nothing different than every other plan in America. This is why the judge had no choice but to find no prudence violation.
The finding of a breach of loyalty is flawed because there was no improper ESG influence in any American Airlines plan investments. BlackRock offers ESG-themed investments options, but American Airlines fiduciaries chose normal index funds that track the S&P 500 and other indexes. In fact, American Airlines fiduciaries affirmatively declined the pilot union’s request to add ESG to the plan. American Airlines fiduciaries chose not to add ESG investments to the plan.
There are three elements to every ERISA fiduciary-breach claim: (1) breach of a fiduciary duty; (2) whether the breach caused an injury, i.e. causation linking the breach to harm; and (3) if there is a breach that causes harm, a calculation of damages. The judge found a breach of the duty of loyalty, but skipped the second component of whether the breach caused any harm or injury to plan participants. He skipped the element of causation.
BlackRock’s investments did not harm plan participants with inferior investment returns. Plaintiffs did not even bother to proffer evidence that any AA investment underperformed any index benchmark. They could not prove it anyway, because trial evidence showed that AA fiduciaries negotiated securities lending offsets to lower investment fees. Some of the index funds had negative fees. Because of the rock-bottom fees, AA participants beat every index benchmark. AA participants were not harmed by “covert ESG” funds. To the contrary, they had the best index returns possible. The BlackRock funds were objectively prudent.
Another way to view causation is to consider what if the plan fiduciaries had hired a purportedly non-conflicted investment manager. What if AA had hired Fidelity, or Vanguard, or State Street for the index funds? There is still the issue that Vanguard and State Street both voted the same way as BlackRock on the Exxon dissident direct proxy votes. But let’s say AA hired an investment manager that did not vote against Exxon management in proxy voting. If they hired the non-conflicted manager, would there have been any adverse difference in investment results? The answer is no. There is no proof that the investment results of the so-called “covert” BlackRock index funds performed less than any other index fund in the market. In fact, the AA BlackRock index funds performed better because of the rock-bottom fees due to higher levels of securities lending that reduced fees. There was no proof of causation because there was no proof that AA participants were harmed. It is reversible error. Nevertheless, the unfair harm to AA’s reputation is hard to reverse.
Finally, there is the issue of damages. The judge skipped the issue of causation, and is moving on to damages, but the opinion signals that he realizes that there are no damages in the case. The damages model is an eight-day event window in May 2021 involving the eight days between the votes of Vanguard and State Street, at which time Exxon stock dipped slightly, and ending on the eighth day when BlackRock voted for the three dissident Exxon directors. Exxon stock did not decline further after the BlackRock vote, as the decline took place when other large investment managers voted. Nevertheless, there is no evidence that any American Airlines participants cashed out of the plan during the eight-day event window. And the evidence revealed that Exxon stock came roaring back in 2022 after the market realized that Exxon’s business strategy was not changing. The company bought Pioneer to double-down on the oil drilling business. Exxon stock surged because the dissident directors favoring climate-change had no effect on Exxon’s business plan.
We note that this is the first ERISA case that we know about in which plaintiffs used a securities class action damages model with an event window. Retirement plans are long-term investments, and damages are never measured by short-term market declines. If ERISA fiduciaries are to be judged by temporary market declines in investment positions, this would be a sea-change in ERISA liability. It would turn ERISA fiduciaries into performance guarantors of short-term investment returns.
While it is wrong on the law, there is nevertheless no evidence that any American Airlines participant cashed out of the plan during the event window. The issue is further moot because Exxon stock recovered, and there is no evidence of harm or damages. We will see what the judge rules, but his goal was to embarrass BlackRock, and that has been achieved.
In sum, the decision is wrong on the law and must be reversed on appeal. It is a political statement against the evil of ESG, with conscientious American Airlines fiduciaries caught as collateral damage. It is remarkable that the first anti-ESG ERISA backlash opinion is against a plan sponsor who is innocent of ESG investing.
KEY POINT #2: The concern over improper ESG investing in the nation’s 401k retirement plans is overblown, because the vast majority of plans do not offer ESG-themed investments.
The initial reaction to the AA trial verdict has been that this will lead to a chilling effect on ESG investing in retirement plans. This thinking misunderstands the investments offered in modern 401k plans. The vast majority of defined contribution plans in America do not offer ESG investments in their core lineup.
The fact that the damages model in the American Airlines case involves Exxon stock proves the point. Exxon stock is vilified by ESG-activists, and removed from many ESG funds. The BlackRock index funds in the AA plan, however, included Exxon stock. They cannot possibly be considered “covert” ESG funds if they contain the stock of a climate-change offending oil company. The BlackRock index funds were generic index funds with no ESG investment strategy. These are the exact same index funds found in the vast majority of defined contribution plans in modern defined contribution plan lineups. There is no ESG investing problem in modern defined contribution plans.
Finally, to the extent that there is ESG investments in today’s retirement plans, it is limited to defined benefit plans. We are not about to defend ESG investment strategies, and are on record when we train fiduciary committees that they have a fiduciary obligation not to change the world with fiduciary retirement assets. We think ESG investing is wrong. We nevertheless understand that there are different gradations or definitions of “ESG,” and most ESG-investing advocates claim that they are acting in the best long-term financial interests of the company. But defined benefit plans are different than defined contribution plans in which participants have individual accounts. As long as plan sponsors meet their obligation to fund all contractually owed benefits in defined benefit plans, plan sponsors arguably have more investment discretion. This does not excuse any non-pecuniary considerations in plan investments, but there is a material difference between defined benefit plans and defined contribution plans.
In any event, the concern over ESG investments in modern 401k plans is overblown. It is a political lightning rod with little actual bearing on the retirement security of 401k plan participants.
KEY POINT #3: Plan sponsors need to hold investment managers like BlackRock accountable for any non-pecuniary action that harms investments, including ESG corporate campaigns or proxy voting that is not the best interests of stock investments.
The American Airlines trial ruling translates into holding plan sponsors vicariously liable for the ESG investments or proxy voting by investment managers, even when the plan sponsor intentionally avoids any ESG-themed investments. Plan sponsors are now on warning that they need to vet their investment managers for ESG bias. But if courts are going to impose vicarious liability on plan sponsors for the actions of investment managers, these investment managers must be willing to indemnify their plan sponsor clients. Investment managers must take responsibility for their ESG-related conduct, and not allow their clients to become collateral damage.
It is impossible to police all conduct of these massive investment managers. It is also impossible to monitor very proxy vote in America. Plan sponsors must delegate to investment managers. But investment managers must stand behind their services and their actions. If they cause liability, like BlackRock did to American Airlines, then the investment managers must pay. If investment managers are going to moonlight by changing the world, they must pay for any liability they cause to their clients.
BlackRock caused this problem, and BlackRock must stand behind the damage it has caused and indemnify its plan sponsor clients.
KEY POINT #4: Rethink allowing finance and other business professionals to serve on the plan fiduciary committee.
What are plan fiduciaries supposed to do after this kind of ruling? Do plan sponsors need to change the way they hire investment managers or manage proxy voting? It is impossible to monitor all proxy voting, and thus it still makes sense to delegate proxy voting to investment managers. But it does behoove plan sponsors to ensure that investment managers tasked to handle proxy voting alert the fiduciary committee anytime a proxy vote is proposed that raises any ESG-type red flag. The Exxon proxy vote was a big news event, and hard to miss. The lesson of the American Airlines decision is that fiduciaries need to intervene when they learn about a high-profile vote that can be considered anti-management or harm a company.
Finally, plan sponsors should re-evaluate who is on the plan fiduciary committee. We have learned from other breach of loyalty cases like UnitedHealth that CFOs or other business professionals who have job goals to grow the company should not participate on the plan fiduciary committee. The American Airlines case raises another source of potential conflicts with Treasury personnel who deal with company investors. To protect against future liability, plan sponsors should avoid including finance personnel on the plan committee that have job responsibilities that include corporate investment relationships.
FINAL THOUGHTS
Thoughtful plan sponsors and fiduciaries are scrambling to understand the American Airlines decision, and what to do next. We believe the analysis starts with understanding that American Airlines fiduciaries did not engage in ESG investing and were collateral damage in the ESG-backlash movement. The lesson of the American Airlines case is that we continue to operate in an unfair litigation environment in which ERISA benefit plans have been transformed into liability traps. That is certainly true when fiduciaries can be vicariously liable for the ESG motives of its investment managers.
We believe that the key takeaway for plan fiduciaries is to ensure that their investment managers take responsibility when they cause liability. Any ESG backlash should be redirected to the investment managers who have caused the problem, not the plan sponsors who are innocent bystanders in the politics of ESG investing.