By Jack Yoest
At a time when the United States is staring down the barrel of a retirement crisis, stability and predictability in employer-sponsored retirement plans have never been more important. With Social Security reserves projected to run dry within the next decade, the retirement security of millions of Americans increasingly depends on the integrity and health of the private retirement system.
To best empower employer-sponsored plans to fill this gap, sponsors and fiduciaries need clarity—clear rules that encourage sound investment practices and protect participants without saddling employers with endless uncertainty and litigation risk. Unfortunately, a recent federal court ruling has done precisely the opposite.
The case, Spence v. American Airlines, illustrates the problem starkly.
Earlier this year, a Texas district court found that although American Airlines fulfilled its duty of prudence (which governs the proper processes in plan management) under the Employee Retirement Income Security Act of 1974 (ERISA), the company and its fiduciaries had still somehow violated their duty of loyalty (which focuses on actions that place participants’ interests above those of employers). This violation happened, not because American Airlines offered poor investments or failed to vet managers appropriately, but because one of its investment managers, BlackRock, offered ESG-focused options to other clients and supposedly engaged in “ESG-related shareholder activism.”
This ruling stretches the concept of fiduciary loyalty to an almost untenable degree and could drag other employers into costly litigation over factors completely outside of their control. To be clear, American Airlines’ retirement plans did not include any ESG-specific investments. The company also adopted processes that were “consistent with and, in many aspects, exceeded the processes of other fiduciaries.” Nonetheless, the court found an alleged breach of loyalty because of BlackRock’s broader corporate activities unrelated to the specific funds offered to American Airlines employees.
Under Judge Reed O’Connor’s interpretation, even the most diligent fiduciaries could be at risk of liability. By this standard, it is not enough for a fiduciary to merely prudently select an investment manager based on financial merit. Instead, they must somehow also anticipate and police the non-plan-related activities and broader business strategies of third-party asset managers—an impossible standard given the complexity and global reach of firms like BlackRock, Vanguard, and State Street. Daniel Aronowitz of Encore Fiduciary rightly observed that by this standard “plaintiffs could sue almost every single 401(k) in the country.”
What could be the end result? Faced with impossible legal standards and the threat of endless litigation, many employers may scale back or abandon retirement offerings altogether. Workers, meanwhile, could soon find themselves with fewer investment options, higher costs, and less access to the diversified index funds that have delivered reliable returns for decades. Instead of strengthening participant protections, the court’s decision risks gutting the availability and affordability of employer-sponsored retirement plans.
None of this is to say that scrutinizing the growing political entanglements of ESG investing is not only legitimate but necessary. Investors deserve transparency and should not have ideological agendas imposed upon them under the guise of financial stewardship. But the solution is not to weaponize fiduciary duty in a way that one former official at the American Retirement Association noted could find a fiduciary could doing “what fiduciaries broadly are expected to do in terms of process” and still be found to have ignored “their obligations to their participants.”
The Spence decision also threatens to distort the core purpose of ERISA itself. ERISA was crafted to ensure that fiduciaries act with both prudence and loyalty, with the overarching goal of maximizing participants’ financial interests. As was noted by prominent ERISA and employee benefits attorney Jeffrey Mamorsky, it is “inconceivable” under ERISA’s original framework to conclude that a fiduciary could be deemed prudent and still found to be disloyal, particularly in a situation such as this where the court found that American’s robust monitoring, documentation and additional layers of review surpassed those typically employed by large plan fiduciaries.
The future of American retirement security is too important to be jeopardized by an overbroad and unpredictable interpretation of fiduciary law. Actions should be taken quickly to clarify fiduciary standards and reassert that ERISA’s duties must focus on sound financial management and participant outcomes—regardless of investment strategy or values. Workers deserve access to strong, stable retirement plans—and fiduciaries deserve the confidence that if they act prudently and loyally toward participants’ financial interests, they will not be punished for the politics of others.
Jack Yoest is an Associate Professor of Leadership and Management at The Catholic University of America in the Busch School of Business. He is a former Assistant Secretary for the Commonwealth of Virginia.