Although American Airlines must remove environmental, social and governance considerations from its 401(k) investments, it will not have to pay monetary damages in an employee lawsuit, a Texas court ruled on Tuesday. Despite proving at trial that the airline favored ESG goals in its 401(k) plan, the plaintiff failed to show that this resulted in financial losses, according to Judge Reed O’Conner of the U.S. District Court for the Northern District of Texas.
“Despite evidence of disloyalty, the court did not find a breach of the duty of prudence, because defendants acted in accordance with prevailing industry practices, which was fatal to plaintiff’s breach of prudence claim,” the ruling said.
Pilot Bryan Spence filed the lawsuit in June 2023. He alleged that American Airlines “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through ESG strategies, proxy voting and shareholder activism -- activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the plan participants.” The suit also challenged “the unlawful decision to pursue unrelated policy goals over the financial health of the plan.”
O’Connor ruled in January that plan fiduciaries were “blinded” by their employer’s focus on ESG factors. In his latest ruling he said that although Spence failed to show a monetary loss,
“equitable or remedial relief” is warranted under ERISA 409(a) “even when losses cannot be quantified in order to prevent recurrence of disloyal conduct and to protect participants prospectively.”
The ruling stipulated several procedural remedies.
“American Airlines shall not permit any proxy voting, shareholder proposals or other stewardship activities on behalf of the plan that are motivated by or directed toward non-pecuniary trends, including but not limited to ESG-oriented investment management and objectives that are not in the exclusive best financial interest of plan participants and beneficiaries” the ruling said.
The airline also must appoint two independent members to serve on its employee benefits committee for five years. These members must not have any relationship with BlackRock, Aon or any other plan administrator, advisor or investment manager of plan assets.
“Apparently, Judge O’Connor saw enough evidence of biased behaviors that he felt it necessary to impose what would seem to be a fairly long and tedious list of procedural and notification requirements on the administration of the plan going forward,” the National Association of Plan Advisors posted on its website. “And it certainly seems to raise the bar in terms of monitoring the proxy behaviors of investment managers selected by the plan.”
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