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:
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.
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
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).