Plaintiffs in the first lawsuit over ESG in a 401(k) just saw a victory that could have enormous implications for asset managers and retirement plans.
In a long-awaited decision issued Friday, US District Court Judge Reed O’Connor found that American Airlines breached its fiduciary duties of loyalty to plan participants by choosing BlackRock as an asset manager within the firm’s $25 billion 401(k) plan system, “allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.”
It’s unclear whether the plaintiffs will be able to show the court that plan participants experienced any financial damages as a result of BlackRock’s inclusion and its use of ESG factors in deciding how to vote on proxy ballots. American Airlines could opt to appeal.
“American has never offered ESG investment options in our 401(k) plan. In fact, the committee that considers investments for our plan has expressly rejected ESG investments," American Airlines said in a statement provided by a spokesperson. "BlackRock’s role in the plan is limited to passive index fund management, and the ruling focuses on American’s oversight of BlackRock’s proxy voting, which aligns with industry best practices. We remain committed to responsibly managing our team members’ retirement savings with appropriate oversight.”
While the judge found a breach of fiduciary duty of loyalty, the same was not the case for an alleged breach of fiduciary duty of prudence.
“Put simply, loyalty serves as a critical backstop. In industries featuring oligopolist or cartel-like behavior – such as the retirement savings industry in which the largest investment managers own significant stakes in all of the relevant actors – industry norms are not enough to safeguard against breaches of loyalty,” O’Connor wrote. “Otherwise, such a low bar would encourage collusion, cause rampant evasion of ERISA’s stringent requirements, and wreak havoc for retirement plan beneficiaries.”
Typically, findings by a court for a violation of a duty of loyalty but not prudence involve prohibited transactions, said Fred Reish, partner at Faegre Drinker Biddle & Reath – something not alleged in the case against American Airlines.
“The opinion is, to say the least, unusual,” Reish said in an email.
“Without a prohibited transaction, it is difficult to see how a prudent decision could be disloyal. In other words, if the decision to use Blackrock as an investment manager was prudent, the ‘disloyalty,’ if any, was immaterial.”
The decision came a day after BlackRock announced its exit from the United Nations-convened Net Zero Asset Managers initiative. Numerous financial institutions have left net-zero groups in recent weeks, following pressure from Republicans, and ahead of President-elect Donald Trump’s return to office. BlackRock is not a party in the lawsuit.
"We always act independently and with a singular focus on what is in the best financial interests of our clients. Our only agenda is maximizing returns for our clients, consistent with their choices,” a BlackRock spokesperson said in a statement.
The court’s decision followed a four-day bench trial last summer.
“It’s a fascinating case – we’ve been tracking it very closely since it was first filed,” said Joshua Lichtenstein, partner at law firm Ropes & Gray. As it was initially brought, the lawsuit was broader in scope, he said.
In the end, it wasn’t about American Airlines making a deliberate decision on the use of environmental, social, or governance factors within the plan – it was about choosing a fund sponsor that considered those.
The court considered “that American Airlines had a corporate policy in favor of change related to ESG consideration, which aligned with the investment manager’s, which was Blackrock,” Reish noted. Additionally, BlackRock’s funds’ ownership of about 5 percent of American Airlines stock presented a conflict of interest, the judge felt, but how that affected the plan sponsor’s duty of loyalty wasn’t explained, he said.
In any case, nothing that was alleged was outside of industry norms, Lichtenstein said – and that is what makes the decision so potentially consequential. If the plaintiffs ultimately succeed, it may all but certainly encourage the plaintiff’s bar to bring claims against an untold number of 401(k) plans, much as has been done in regard to fees and investment selection.
“That’s a problem. That’s every 401(k) plan in America,” Lichtenstein said, referring to proxy-voting considerations by asset managers widely, not specific to BlackRock.
There wasn’t any indication that American Airlines ever considered ESG factors in any decision, he said.
“The biggest question is: Are the damages large enough to make this type of claim appealing to the plaintiffs’ bar?” he said.
“While it’s clear this case is pretty politically motivated, those follow-up cases simply wouldn’t be.”
A single decision by a district-level court doesn’t necessarily mean there will be a deluge of successful cases brought on ESG within 401(k) plans, he said. And it's impossible to know ahead of time the outcome of a potential appeal in the Fifth Circuit Court of Appeals, he said.
“It may be difficult to establish losses in this case, because the plaintiff’s case is premised primarily on the theory that BlackRock harmed retirement plan participants by voting for a slate of dissident directors at ExxonMobil in May 2021,” shareholder advocacy group As You Sow said in a statement. “Since the new board took over, XOM stock has more than doubled in value.”
Further, the court’s finding that American Airlines acted prudently but not loyally to plan participants complicates damages, Reish said.
“While it is conceptually easy to determine damages for an imprudent investment decision, it is more difficult to determine damages for a loyalty violation related to a prudent investment,” he said.
Asset managers have long considered various ESG criteria within their broad investment decision-making process, even if funds do not hold themselves out as sustainable or ESG in nature. In part, that is because risks around ESG, especially climate change, are often considered financially material.
“If left to stand, the district court opinion in Spence v. American Airlines poses a serious threat to investors’ right to rely on financial advisors and asset managers or make their own informed decisions about how to invest their retirement savings,” said Danielle Fugere, president and chief counsel of As You Sow, in the group’s statement. “This decision is a threat to the fundamental tenets of capitalism.”
Editor's note: This story has been updated with additonal comments, including a statement from American Airlines.
The industry watchdog's own reports reflect failures to deter "willful" and "repeat" violations, raising a crucial question about the future of regulation.
Acting Chairman Mark Uyeda directed SEC staff to initiate a pause in court while the commission awaits a quorum. The SEC may decide to withdraw from defending itself in a lawsuit over last year's climate disclosure rule.
The top estate planning platform's veteran hire will lead its legal team's efforts to develop estate planning, tax analysis, and wealth transfer solutions for ultra-high-net-worth clients.
“If Morgan Stanley had called my client’s son, this wouldn’t have happened,” the investor's attorney said.
Meanwhile, Ameriprise has bolstered its own ranks as an LPL defector joins its branch channel in California.
From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.
Blue Vault features expert strategies to harness for maximum client advantage.