In a landmark ruling, American Airlines has been found to have mismanaged its employees’ retirement funds by engaging in investment practices that prioritize Environmental, Social, and Governance (ESG) factors. The case, Spence v. American Airlines, Inc., was decided by Judge Reed O’Connor of the Northern District of Texas on January 10, 2025.
The lawsuit was initiated by Bryan Spence, a pilot and participant in the American Airlines 401(k) Plan, who alleged that the airline and its Employee Benefits Committee (EBC) breached their fiduciary duty of loyalty under the Employee Retirement Income Security Act (ERISA). The court found that American Airlines and the EBC included funds managed by an investment manager known for engaging with issuer companies on ESG-related issues and occasionally voting proxies in support of ESG-related proposals.
Judge O’Connor’s ruling is significant as it marks the first time a federal judge has issued an on-the-merits decision on the controversial topic of ESG and the duties of retirement plan fiduciaries under ERISA. The judge determined that while the defendants’ monitoring practices were in line with prevailing standards among other large plan fiduciaries, they failed to act solely in the best financial interests of the plan participants.
American Airlines failed to protect workers’ 401ks in ESG case federal court finds
The court’s decision has far-reaching implications for all sponsors of 401(k) plans, as it challenges the nearly universal practice of delegating proxy voting authority to external managers. The ruling suggests that plan fiduciaries may need to implement more robust due diligence of managers’ voting records, consider certification protocols, or even assess the use of pass-through voting, where votes are passed on to the participants and beneficiaries directly.
Could ESG Funds be Removed from Your 401(k) Plan? | Kiplinger
American Airlines has stated that they are reviewing the decision, and the legal community expects an appeal at the Fifth Circuit. The case highlights the ongoing debate over ESG investing practices and their impact on fiduciary duties, with potential ramifications for retirement plan management across the United States.
