This caught my attention: “A Texas federal judge has targeted ‘cartel-like’ 401(k) investment managers in a ruling against American Airlines Group Inc. that could put nearly every plan in the country at risk of a fiduciary mismanagement lawsuit.” Every 401(k) plan?! What is going on?

Spence v. American Airlines (AA) is a class action lawsuit brought on behalf of participants in AA’s 401(k) plan. It asserts that AA breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by selecting retirement fund managers that allegedly have “ESG objectives.”

ERISA has two guidelines for employers: the duty of prudence, which governs the proper processes in plan management, and the duty of loyalty, which focuses on actions that place participants’ interests above those of their employers. Weirdly, in this case, the judge ruled that AA had failed its duty of loyalty, but did not find a breach of its duty of prudence. Indeed, the actual investments made by AA were in index funds that did not have ESG objectives and did not underperform the overall market. This fulfills the fiduciary responsibility. Instead, the judge ruled that AA put its interests above its employees. As Bloomberg Law put it:

Together, BlackRock, State Street, and Vanguard oversee more than $5.4 trillion in US retirement assets, according to Bloomberg market share analytics. And all three have, at times, embraced proxy voting standards and external investment strategies with an eye toward environmental, social, and corporate governance goals.

“They’re the Walmart, Target, and Amazon of index funds,” said Daniel Aronowitz, president of Encore Fiduciary, an insurer that underwrites retirement plans against fiduciary liability suits. “Everybody has the same risk. By that standard, plaintiffs could sue almost every single 401(k) in the country.”

It will be interesting to see how this plays out. There are additional steps (e.g., identifying damages) for this judge and there is always the potential for a reversal upon appeal. But it seems a bit odd to conclude that AA would fail its employees by investing in an index fund that meets the market return – no matter whose name is on it. And as a practical matter, the great love affair with ESG investment appears to be over – although ESG products should remain available to those who wish to purchase them. Regardless, an incoherent but sweeping ruling that imposes litigation risk on every 401(k) plan is hardly to be applauded.