Two recent decisions from the United States District Court for the Northern District of Texas have created confusion among private-sector retirement trustees governed by the Employee Retirement Income Security Act (ERISA) as to the factors to be considered in making investment decisions and assets allocations. Although state and local government retirement plans are exempt from ERISA, the fiduciary standards for investment of plan assets are generally the same in state laws as they are in ERISA.

The first decision issued on January 10th in Spence v. American Airlines determined that the trusts of the airline’s retirement plan for pilots failed to abide by the fiduciary duty of loyalty by considering matters other than pure economic return. The managers were criticized for their inclusion of ESG (environmental, social, governance) issues in the proxy voting and shareholder activism of the companies. Although there was no evidence presented that the particular investment offerings performed any less well than investment offerings with no ESG component.

In reaching its conclusion, the Court analyzed the key elements of fiduciary duty – prudence and undivided loyalty. On the first issue, the Court found that the consideration of ESG factors in reaching investment decision-making was ubiquitous in the retirement industry. At the very least, all investment decisions are based on measures of risk and every investment strategy, by necessity, must consider the effect of ESG factors on risk. Having found that the airline’s trustees acted prudently in using BlackRock products, the court turned to the question of undivided loyalty. The Court was critical of BlackRock’s proxy practices which included votes on social issues. The Court found that giving heed to those issues, even in the absence of an economic impact on the retirement products offered nonetheless places other factors ahead of the best interest of the plan participants. Ironically, there was no criticism of the investment results.

Only a month after the Spence decision, a different judge in the Northern District of Texas in Utah v. Micone, upheld the Biden-era rules from the Department of Labor (DOL) allowing ESG considerations if the economic or pecuniary measures of an investment were the same with an ESG as those without. In Utah, a number of state attorneys general, trade associations and others sued to invalidate the DOL rule as being contrary to ERISA fiduciary standards. In a 2023 decision, Judge Kacsmaryk upheld the rule as a valid exercise of agency discretion. In 2024, the U.S. Supreme Court vacated a 40-year-old rule of judicial deferral (Chevron deferral) to agency expertise in the case of Loper Bright Enterprises v. Raimondo. The 2023 decision was appealed to the U.S. Court of Appeals for the Fifth Circuit which returned the case to Judge Kacsmaryk to reconsider his earlier decision in light of the Supreme Court decision. Judge Kacsmaryk reaffirmed his decision. The Court found that ERISA defines whose interest a fiduciary must protect and what the fiduciary’s purpose is. He also found that ERISA says nothing about what a fiduciary may consider. The Court further found that a fiduciary cannot advance interests other than the those of the participants. Most significantly, the Court said: “[W]hen a fiduciary comes to two routes that each equally serve the plan’s financial interests, any choice the fiduciary makes is for the ‘exclusive purpose’ of financial benefit. He has acted with the duty ERISA requires. If a fiduciary chooses between financially equal plans using other factors, nothing about the fiduciary’s purpose has changed.”

When read side by side, Spence and Utah reach diametrically opposing results. So, where does that leave a prudent fiduciary? It leaves them uncertain and confused. More significantly, it leaves fiduciaries with the choice of selecting less potentially successful financial decisions that have an element of ESG consideration in favor of those decisions that eschew ESG altogether even though doing so may increase risk or decrease reward.

Contrary to a Greek chorus of naysayers, the American retirement programs, both for private and public sector employers has been generally successful. The tangential consideration of ESG as a measure of determining risk has not derailed or retarded that success. For public plans, which are expressly excluded from ERISA, a significant number of state laws have similarly attempted to restrict fiduciary discretion in investment decisions by mandating boycotts in some cases and outlawing them in others. At least one Congressional committee has expressed an interest in regulating public plan investment decisions even though the federal government has never provided any financial support to state and local pensions.

Fiduciaries should be left to exercise their sound discretion for the best interest of members and beneficiaries. Legislative forays into politicizing investment decisions have actually placed one set of social or political objectives ahead of the financial interests of the pension participants. This is no different than a decision by a wayward fiduciary who attempts to use the pension fund’s assets to achieve a goal other than achieving the highest and best return at a reasonable rate of risk.

This battle is neither new nor settled. Beginning with divestment requirements aimed at the former apartheid government in South Africa in the early 1980s, politically based rules and limits on investments have ebbed and followed. Fiduciaries should focus on “doing well,” meaning making money prudently for the retirement plan. If in doing so, the investment decision also does “good,” that salutary byproduct should not jeopardize the independence of retirement trustees to focus on securing a sound retirement for plan members and beneficiaries.

Mr. Klausner is the principal in the law firm of Klausner, Kaufman, Jensen & Levinson. For 47 years, he has been engaged in the practice of law, specializing in the representation of public employee pension funds. 

The opinions expressed in this article are those of the author and do not necessarily reflect the views of The National Law Review.