PLANSPONSOR - November - December 2023 - 39

INSIDE ANGLE
An Influential Opinion
The DOL's recent advisory opinion may yield far-reaching opportunities
T
he Department of Labor recently addressed several key
Employee Retirement Income Security Act issues in
Advisory Opinion 2023-01, responding to a Citigroup Inc.
request for guidance about its racial equity program. The advisory
opinion could have broad implications for plan sponsors interested
in establishing similar programs that foster diversity or other such
goals. The program, the advisory opinion and the implications of
the DOL's guidance are described in further detail below.
The Program
In short, Citigroup's program involves a commitment by the plan
sponsor to pay all or some portion of the investment management
fees for diverse managers retained by the sponsor's defined benefit
and defined contribution retirement plans and welfare benefit
plans. Citigroup asked the DOL for its views on how ERISA Title
I's fiduciary responsibility provisions apply to the program.
The fiduciary of the plans in question is an investment
committee that maintains the authority to hire managers for
the plans. The committee would apply a set of predetermined
criteria-including candidates' credentials, assets under management,
years in business and asset class experience-to identify
manager candidates as potential awardees of investment management
mandates. The sponsor commitment to pay all or a portion
of applicable investment management fees for some candidates
that are " diverse managers " would be factored into the evaluation
process when considering performance and cost factors.
The Opinion
In connection with the program, the DOL addressed three key
ERISA considerations within its advisory opinion.
First, the DOL noted that it did not view the plan sponsor as
the fiduciary with respect to the selection of investment managers
solely by reason of establishing the program and by paying the
plans for diverse managers' fees pursuant to program commitments.
The DOL noted that the plan sponsor would remain
responsible for selecting and monitoring investment committee
members, and the committee would function as a fiduciary when
engaged in the process of implementing the program.
Second, the DOL opined that the committee members'
consideration of the sponsor-related fee commitments is an appropriate
and relevant factor when evaluating investment options for
the plans. Importantly, the DOL noted that it would not view the
committee members' best judgment as fiduciaries as being influenced
by their awareness of the program's potential for generating
reputational benefits to the sponsor. The DOL cautioned, however,
that it would be inconsistent with ERISA's fiduciary standards if
the committee members exercised their fiduciary authority for the
purpose of advancing corporate public policy goals.
The DOL also opined that describing the program in relevant
participant disclosure materials would not, in and of itself, violate
ERISA Section 404(c) by exercising improper influence or control
over participant investment decisionmaking that would render
the fiduciary protections unavailable.
Finally, the DOL noted that, while participant disclosure
materials would need to reflect the expense ratio for a 401(k)
plan's diverse equity managed investment option, it would also
be permissible to include an explanation of the plan sponsor's
commitment to absorb all or a portion of the cost of that expense.
The Ramifications
Plan sponsors that may seek to promote various causes through
their own benefit plans may consider the program and the DOL's
opinions in the advisory opinion helpful in creating a path to
pursue such alternatives.
The DOL acknowledged that a plan sponsor would not act as
a fiduciary by offsetting investment management fees and that
the plan fiduciaries considering the offset would not automatically
engage in a prohibited transaction simply because the plan
sponsor may derive some intangible benefit from the program.
There may be other challenges a sponsor should consider
before implementing such a program. There may be potential
tax implications not described by the DOL. Moreover, in the
context of diversity efforts, the implications of the June Supreme
Court decision in Students for Fair Admissions Inc. v. President and
Fellows of Harvard College, which held that certain college admissions
programs violated the Equal Protection Clause of the 14th
Amendment, could be relevant.
Those questions notwithstanding, the DOL's advisory
opinion was encouraging for Citigroup's program and opens
doors for similar approaches at other organizations.
Steve Saxon is a partner in Groom Law Group, Chartered,
and George Sepsakos is a principal in Groom. Offices for
Groom are in Washington.
PLANSPONSOR.COM November - December 2023 39
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