"Based on the subject matter, the opinion is groundbreaking," DeMatties said in an interview. "The Department of Labor hasn't spoken to how to set up a program like this or had such clarity before regarding how to set up a settlor program based on a company's corporate interest that avoids the applications of ERISA fiduciary rules."
Citi has announced plans for a voluntary program that's part of its larger Action for Racial Equity initiative, which is designed to address the "racial wealth gap," according to the advisory opinion. Under the Diverse Asset Manager Program, Citi commits to pay all or part of the fees of diverse asset managers for the ERISA plans it sponsors.
Asset manager fees are typically paid from a plan's trust.
The advisory opinion applies to Citi's ERISA-covered plans, which include defined benefit and defined contributions plans.
In total, Citi had $15.8 billion in U.S. defined contribution plan assets and $10.2 billion in defined benefit plan assets as of Sept. 30, 2022, according to Pensions & Investments data.
The main issue the department considered in its advisory opinion is whether Citi's conduct in establishing and maintaining its Diverse Asset Manager Program or in paying investment management fees under the program would be considered "settlor" or "fiduciary" in nature.
The department has long recognized there is a class of discretionary so-called settlor activities that relate to the formation, rather than the management, of plans, the department noted in its opinion. These functions include decisions relating to the establishment, design and termination of plans and, except in the context of multiemployer plans, generally are not fiduciary activities governed by ERISA, the department added. Fiduciaries are held to higher standards and must always act in the best interest of plan participants and beneficiaries.
Ultimately, the department determined that it would not view Citi as a fiduciary for its initiative to pay directly or reimburse its retirement plans for diverse managers' fees.
The investment committees for Citi's retirement plans will serve as named fiduciaries under ERISA with discretionary authority to manage and control their respective plan's investments, the Labor Department specified in its opinion.
"When you set up a program like this, this program involves a component of what the company wants," DeMatties said. "The company is interested in seeing whether it can put a program in place that will encourage more diverse investment managers with respect to its plans. But the fiduciaries when they hire an investment manager, they can't think about what the company wants."
He added, "It was important to determine and get clarity that the company in establishing the program is doing so as a settlor, so that it's OK the program reflects, in this case, Citibank's corporate interests, but still nevertheless we can have a parallel fiduciary process that's done properly in accordance with the law."
Citi currently expects that an asset manager will qualify as a diverse manager for purposes of the program if it has a total minority/female ownership of at least a specific percentage set forth in the program, such as 50%, according to the opinion.
And even though the opinion is groundbreaking, "The beauty of this is that it's very well grounded," DeMatties said. "The underlying logic that is relied on in this letter is based on guidance that the department has been publishing going back to at least the 1980s."
The opinion only applies to Citi, but others in similar positions may use it as a model for moving forward, DeMatties said.
