Novel DOL Guidance Addresses an Investment Advisor Program that Favors Racial Diversity:

This guidance, issued on October 6, 2023 as Advisory Opinion 2023-01A, responds to Citigroup Inc.’s (“Citigroup’s”) request for the DOL’s views on Citigroup’s Action for Racial Equity Asset Manager Program (the “Program”). Under the Program:

  • Citigroup will pay all or some portion of the investment management fees charged by “Diverse Managers” who are retained by Citigroup-sponsored employee benefit plans.  (Citigroup expects that an investment manager will qualify as a Diverse Manager if it has “a total minority/female ownership of at least a specific percentage set forth in the program, such as 50 percent.”
  • For plans that participate in the Program, Citigroup will allocate “a pre-determined aggregate amount.”
  • Citigroup has appointed an Investment Committee for each plan involved in the Program. Each Investment Committee will serve as a named fiduciary under ERISA, with discretionary authority to manage and control their respective plan’s investments.
  • Citigroup states it will not attempt to influence the Investment Committees in their decision-making process regarding potential use of the Program.
  • Citigroup expects that its agreement to pay for all or part of a Diverse Manager’s fees will be set for a minimum of 3 years, so that each Investment Committee can make decisions by taking that duration into account.
  • The Program will not apply to, and no payment of investment manager fees will be made under the Program with respect to, any investment manager who is a party-in-interest under ERISA because of its affiliation with Citigroup, or in which Citigroup otherwise has an interest that might affect an Investment Committees’ judgment as a fiduciary.

Based on those Citigroup assertions, Advisory Opinion  2023-01A provides the DOL’s thoughts on three questions. 

First, will Citigroup become a fiduciary with respect to the selection of investment managers under the Program, by making payments to a Diverse Manager, or by reimbursing a plan for a Diverse Manager’s fee pursuant to the Program? The DOL stated:

  • In the context of “settlor” (non-fiduciary) functions, plan sponsors have discretion in determining, as a matter of plan design, the extent to which reasonable plan expenses are paid by the plan or by the plan sponsor. Plan sponsor decisions as to whether, and under what circumstances, the sponsor will pay fees and expenses that could otherwise appropriately be paid by the plan are settlor decisions not subject to ERISA’s fiduciary standards. Thus, Citigroup will not become a fiduciary with respect to making payments to a Diverse Manager or by reimbursing a plan for a Diverse Manager’s fee pursuant to the Program.
  • However, given that Citigroup is responsible for the selection and monitoring of Investment Committees’ members as plan fiduciaries, Citigroup is a fiduciary with respect to that exercise of discretionary authority or control regarding the plans’ management.

Second, will the Investment Committees be deemed to have violated ERISA by taking Citigroup’s fee payment commitment into account in decisions regarding the selection of, or allocation of investment assets to, a Diverse Manager? Here, the DOL noted:

  • When selecting a service provider (e.g., investment managers), ERISA requires a fiduciary to engage in an objective process designed to elicit information necessary to assess the service provider’s qualifications, quality of the services offered, and reasonableness of the fees in light of the services provided. That selection process should be designed to avoid self-dealing, conflicts of interest, or other improper influence. 
  • Investment Committees’ members will not violate their ERISA fiduciary duties  “solely by virtue of considering as one factor in the selection process that an investment manager’s fees otherwise payable by the Plan will be reduced or paid in full” by Citigroup under the Program.

Third, will the inclusion of information regarding the Program and payment of fees thereunder (in disclosures required by ERISA section 404(c)) result in that section’s fiduciary protections being unavailable to an otherwise eligible plan? In this connection, the DOL stated:

  • ERISA section 404(c) provides certain relief from liability for fiduciaries of a retirement plan that permits participants to exercise control over the assets in their individual accounts. A participant’s exercise of control does not satisfy that section if, among other conditions, he or she is subjected to improper influence by a plan fiduciary or the plan sponsor.
  • Citigroup states that plans will be able to offer a “private label fund,” for which the respective Investment Committee may select the investment manager. In such a case, the Investment Committee will calculate the fund’s total annual operating expenses (e.g., expense ratio) in accordance with the DOL’s fee disclosure regulation, without regard to Citigroup’s commitment to pay all or part of a Diverse Manager’s fee. The expense ratio figure must include the Diverse Manager’s fee, however.  
  • Fee disclosures regarding the Program will not constitute improper influence by a plan fiduciary or the plan sponsor with respect to participants’ exercise of control for purposes of ERISA section 404(c).