DOL issues Advisory Opinion finding no ERISA fiduciary issues with Citi’s Diverse Managers/Racial Equity Program

The Department of Labor has issued an Advisory Opinion (2023-01A) to Citigroup Inc., reviewing Citi’s “Racial Equity Program.” According to DOL, that program “involves a commitment by Citi to pay all or some portion of the investment management fees for ‘Diverse Managers’ retained by Citi-sponsored employee benefit plans.” According to DOL, under the REP, and subject to certain limitations and representations:

Citi will not become a fiduciary with respect to the plans.

The Citi plans’ Investment Committees will not be deemed to have violated certain ERISA fiduciary rules by taking the REP “subsidy” (Citi’s commitment to pay Diverse Managers fees out of its pocket) into account in selecting/monitoring investment managers.

ERISA section 404(c) protection will remain available to otherwise eligible Citi plans.

In this article we discuss the Citi REP and DOL’s Advisory Opinion in some detail. We then briefly note some other issues – besides those covered in the Advisory Opinion – the program might raise.

Citi’s Racial Equity Program

An Advisory Opinion sets forth DOL’s thinking with respect to a specific set of facts, and it’s not always clear which facts are “have-to-have” and which aren’t. So, we’re going to spell out the REP (as described in the Advisory Opinion) in some detail:

As noted, under the REP, Citi will pay, for a minimum commitment of three years, all or some of the investment management fees of “Diverse Managers” retained by Citi-sponsored defined benefit, defined contribution, and welfare plans that hold investment assets.

A Diverse Manager will be defined under the REP as a manager with a specific percentage (e.g., 50%) minority/female ownership, with minority/female ownership determined by an independent firm (eVestment). Citi affiliates would be excluded.

The program will be funded to a “pre-determined aggregate amount” allocated on a plan-by-plan basis.

The current plan is for “a cap on the total amount available under the program, a cap on the amount available to individual Diverse Managers, a first-in-time selection mechanism to allocate amounts available under the program, and a limit on payment of incentive fees.”

Citi intends to publicize the REP (but not individual Diverse Manager decisions) to the general public, which “may result in benefits to Citi in the sense that it may be viewed favorably by its employees, the general public, its shareholders, potential customers, business partners, and other interested parties.”

Generally, the plan Investment Committees will make manager retention decisions independent of the REP, except that: “Citi expects that the program and related commitment to pay all or a portion of Diverse Managers’ investment management fees would be factored into the process when the Investment Committees are considering proposed fees and performance as part of the side-by-side filtering process.”

The Investment Committees will “retain sole and complete discretion with respect to investment manager selection.” This clearly is a critical element for the fiduciary issues with respect to which Citi is seeking DOL reassurance, and in this regard, Citi makes a number of specific representations:

Citi … will not attempt to influence the Investment Committees in their decision-making …. Citi … will not consider the Investment Committees’ use of the program (or lack thereof) when making any decision regarding the Investment Committees, including in the exercise of Citi’s fiduciary responsibility to appoint and monitor the Investment Committees and their members. The program will not provide Citi with any rights regarding investment manager selections or allocations. The program will not mandate that the Investment Committees engage in any particular search or selection processes, and the Investment Committees will not be asked to explain program-related decisions regarding investment manager selection. There will not be numerical goals or similar requirements regarding engagement of Diverse Managers that Investment Committees must meet to receive reimbursements under the program.

DOL’s Opinion Letter

With that factual background, DOL answered three questions Citi put to it.

Issue 1: In paying for all or a portion of the fees of some asset managers under the plan – while the fees of other asset managers are entirely paid out of plan assets – will Citi be a fiduciary?

Short answer: No. Quoting DOL: “based on Citi’s representations regarding the program, the Department would not view Citi as a fiduciary … solely by reason of establishing the program or by paying or reimbursing the Plans for Diverse Managers’ fees ….” DOL views the decision by Citi to pay some fees incurred by the plan (that is, the fees of Diverse Managers) and not others as a “settlor” function, not a fiduciary decision.

Sidebar: Settlor vs. fiduciary functions. It has long been understood that ERISA recognizes certain decisions as belonging to the sponsor as “settlor” of the plan’s trust. Examples of settlor functions include: the sponsor’s decision to establish a plan, the design of a plan (e.g., its benefit formula or matching contribution rate), the decision to terminate a plan, and the decision to pay administrative expenses out of plan assets or, alternatively, out of the sponsor’s pocket.

These settlor functions are non-fiduciary and are distinguished from fiduciary functions such as discretion over the investment of plan assets and the retention of investment managers.

In this regard, however, Citi’s possible influence over Investment Committee decisions is (as we said) critical. Citi, as plan sponsor, is a fiduciary, and as the employer of Investment Committee members, it has considerable (potential) power. If it uses that power to influence the decisions of committee members, then (in all likelihood) it would be a fiduciary. Quoting DOL: “Although Citi represents that an Investment Committee’s use of the program will not impact Citi’s decisions regarding selection and monitoring of Investment Committee members, whether Citi’s actions in this regard are consistent with ERISA’s fiduciary standards involves questions that are inherently factual.” (Emphasis added.)

Issue 2: Will the Investment Committees violate ERISA fiduciary rules by considering the REP “subsidy” (Citi’s commitment to pay Diverse Managers fees out of its pocket) in selecting the plan’s investment managers?

Short answer: No. Indeed, the opposite is the case – quoting DOL “Rather, the Department would view appropriate consideration of the program and any commitments under it as another relevantfinancial factor in evaluating the fees to be incurred by the Plan in choosing among investment managers.” (Emphasis added.)

Issue 3: Can information about the REP “subsidy” be included in ERISA participant fee disclosures without compromising the plan’s 404(c) protection?

Short answer: Yes, but only as supplementary information. For participant directed individual account plans, DOL participant disclosure regulations require that the plan administrator provide participants with information with respect to funds in the plan fund menu including “total annual operating expenses before any waivers or reimbursements.” But: “nothing in the regulation precludes a plan administrator from including additional information that the plan administrator determines appropriate for comparisons of investment alternatives, provided such information is not inaccurate or misleading.” In DOL’s view, that additional disclosure (for purposes of “comparisons of investment alternatives”) would not compromise ERISA 404(c) protection.

Other issues

One issue that could be raised: Does Citi’s “subsidy” under the REP of the fees that certain (minority) advisors would otherwise charge to the plan constitute a contribution under the Tax Code, e.g., for purposes of various Tax Code contribution limits? As we understand it, it is being argued that the REP subsidy would instead be treated simply as payment of an administrative expense, which is generally not treated as a contribution/counted against those Tax Code limits.

The REP raises a number of non-ERISA/Tax Code questions, most obviously under the securities laws.

Conclusion

Given the framing of the Advisory Opinion, the biggest issue is the “inherently factual” one of whether Citi, as sponsor, in furtherance of its own business purposes – having Citi “viewed favorably by its employees, the general public, its shareholders, potential customers, business partners, and other interested parties” – has (despite its representations) tried to influence committee decisions. After all (one assumes) all the members of the Investment Committees work for Citi and have duties other than just picking investment managers. Indeed, it’s possible (we do not know, of course) that some of these Citi employees’ compensation is in part dependent on meeting certain diversity goals. In that context, one can imagine a plaintiff’s lawyer asking herself the question: “how can I create enough doubt about Citi’s role in this process that I can make an ERISA fiduciary claim based on ‘improper Citi influence’ that will get past a motion to dismiss?”

The REP has not (as we understand it) been implemented yet. As it is implemented, it will be interesting to see the response of other sponsors, providers, and participants.

We will continue to follow this issue.