Citi Gets DOL Approval for Diverse Manager Plan Fee Payments

The Department of Labor has approved a Citigroup Inc. program that promotes diverse investment management firms among the investment managers for Citibank-sponsored ERISA-covered employee retirement plans.

Citi had sought review from the regulator for its Diverse Asset Manager Program in which the bank commits to pay all or part of the fees of diverse asset managers for the ERISA plans it sponsors. The DOL gave its stamp of approval in an advisory opinion issued September 29, noting that plan sponsor decisions to pay fees and expenses are not subject to ERISA fiduciary standards, if all substantive ERISA requirements are met.

“In the Department’s view, the Investment Committees’ members will not violate their fiduciary duties under ERISA section 403(c)(1) or 404 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 Citi under the program,” Karen Lloyd, chief of the DOL’s division of fiduciary interpretations, wrote in the opinion.

Lloyd wrote that the DOL would view appropriate consideration of the program and any related commitments “as another relevant financial factor in evaluating the fees to be incurred by the Plan in choosing among investment managers.”

Thompson Hine LLP, the law firm representing Citi, called the opinion “groundbreaking.” The firm wrote in an announcement that the opinion is the “first time” the DOL has weighed in on how much latitude a plan sponsor has in which plan-related fees it will pay or not pay.

The attorneys also said that the DOL laid out “explicit guidance” on how a plan sponsor can structure a “program based on the plan sponsor’s corporate interest in a manner that avoids application of ERISA’s fiduciary rules to that program.”

In the opinion, the DOL clarified that the selection of a plan investment manager or any plan service provider is subject to ERISA fiduciary responsibility, including assessing the provider’s qualifications, the quality of the services offered and the reasonableness of fees. How those fees are paid, however, are “settlor decisions not subject to ERISA fiduciary standards,” Lloyd wrote.

Citi’s attorneys noted that the program on which the DOL ruled is part of its Action for Racial Equity, designed to address the racial wealth gap among the businesses in which Citi operates.

Lloyd, of the DOL, emphasized that mission in the opinion, writing that “Citi’s experience has been that diverse managers’ market share lags their representation in the asset management industry for reasons unrelated to risk-adjusted returns.”

The regulator noted that, while it is possible under ERISA to make the decision to select diverse managers, it must adhere to the usual standards of a fiduciary choosing a plan service provider.

The DOL “would not view the Investment Committees’ members’ best judgment as fiduciaries as being influenced merely because they were aware of the program’s potential for generating reputational benefits to Citi,” the DOL wrote. “However, it would be inconsistent with the duties and prohibitions of ERISA sections 403, 404 and 406 for Investment Committee members to exercise their fiduciary authority for the purpose of advancing Citi’s corporate public policy goals.”

The regulator also made clear it was not advocating for the selecting of diverse managers as a fiduciary obligation in and of itself, but rather, an example of a choice made by a plan sponsor within the bounds of ERISA obligations.

“It is important to emphasize that this letter should not be read as expressing the view that it is inconsistent with ERISA’s fiduciary standards for an Investment Committee to ever consider diversity, equity, and inclusion factors as material to the merits of choosing a particular investment manager from a financial perspective,” the DOL wrote. “Citi did not ask for an opinion on that subject, and this letter does not address the issue. Similarly, this letter should not be read as expressing the view that a program like the one described in this letter is required for a fiduciary to select a diverse manager.”