Conflicting legal rulings create unnecessary uncertainty for retirement plans

Responding to two recent court rulings impacting retirement plans, Robert D. Klausner, principal in the law firm of Klausner, Kaufman, Jensen & Levinson, writes in The National Law Review that prudent fiduciaries of retirement programs are left “uncertain and confused.”

Earlier this year, U.S. District Judge Reed O’Connor ruled in the case of Spence v. American Airlines that American Airlines’ decision to have BlackRock manage part of its retirement program fulfilled the company’s duty of prudence, but surprisingly didn’t also fulfill its duty of loyalty to its beneficiaries.

Just one month later, U.S. District Judge Matthew Kacsmaryk upheld his earlier ruling in the so-called Utah v. Micone case allowing ERISA fiduciaries to consider non-pecuniary factors, such as ESG, when selecting investment options.

When considering both of the rulings from Spence and Utah, they reach very different conclusions. As pointed out by Klausner, this leaves prudent 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.”

Public retirement systems aren’t immune from contradicting policies and laws. Many states have passed laws prohibiting asset managers from considering ESG factors, including blacklisting some of the largest fiduciaries from doing business; Other states have pushed laws requiring managers to consider the same factors.

Klausner, who has been engaged in law specializing in the representation of public employee pension funds for 47 years, points out that both private and public retirement plans have been successful, and that ESG considerations made by fiduciaries have not hindered that success.

However, the intrusion of politics into the decision-making processes of asset managers – who are primarily focused on maximizing returns for their public and private clients – does have the potential to hinder the success of investment strategies.

Klausner concludes by stating: “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.”

At a minimum, at a time when retirement confidence is extremely low, financial institutions need clear rules and consistent legal rulings to ensure secure retirement savings for all Americans.