Citibank can offer 401(k) plan sponsors a roadmap to help close the ‘racial wealth gap’

Citibank has received approval from the Department of Labor (DOL) for a program that will promote diversity in investment management for retirement funds.

According to a letter released on Sept. 29 by DOL, Citibank’s Diverse Asset Manager Program was proposed as part of its Action for Racial Equity (ARE) initiative. The DOL letter described the program as: “Citi’s response to a set of social issues that it refers to as a ‘racial wealth gap’ affecting the business environment in which Citi operates,” the DOL letter said. “Citi describes ARE as a comprehensive approach to increasing investment in Black-owned business, advancing racial equity practices in the financial services industry, providing greater access to banking and credit in communities of color, and expanding home ownership among Black Americans.”

On Sept. 29, Karen Lloyd, who leads the Division of Fiduciary Interpretations at the DOL Office of Regulations and Interpretations, approved Citibank’s program, saying that it does not interfere with fiduciary roles and is entirely voluntary.

Clarifying new DEI efforts

According to Dominic DeMatties, a partner at Thompson Hine, the law firm that represented Citibank in the matter, the bank had approached DOL to clarify questions around fiduciary roles for such a program and how they fit with the ERISA Employee Retirement Income Security Act of 1974 (ERISA) regulations that the DOL oversees.

“The DOL approved a Citibank program under which it will commit to pay some or all fees of a diverse investment manager in a settlor capacity without its conduct being considered fiduciary under ERISA,” DeMatties said. “There had previously been no guidance from the DOL regarding how a plan sponsor may permissibly pursue its DEI initiatives in connection with its ERISA plans without the conduct being fiduciary.  From that perspective, the opinion offers a road map for a new alternative.”

Related: Financial wellness for employees of color: A new approach to narrow the wealth gap

Under the new program, Citibank will pay for or subsidize manager fees from groups that fall under the program for a minimum of three years, subject to certain caps. Investment managers will qualify for the program if their firm has a total minority ownership, or female ownership, that equals or is more than percentages set in the program. No investment manager that Citibank has an interest in would be eligible for the program.

The DOL opinion said that under the program, Citibank would be considered a “settlor,” which is separate from a fiduciary. There is also language for disclosure of payment of fees, and DOL ruled that such fees and the program itself will not constitute improper influence over assets, under ERISA rules.

A voluntary way to address diversity issues

According to a Thompson Hine statement, the ruling gives groups such as Citibank more flexibility to promote diversity and equity among the investment managers with which it works. “With this Opinion, an alternative pathway is now available for a plan sponsor to design its plan in a manner intended to further its corporate DEI initiatives without subjecting that design choice to ERISA’s fiduciary duty rules.” The statement said.

DeMatties said the ruling gives guidance to plan sponsors on how they may pursue DEI initiatives by working with service providers in ERISA-compliant retirement plans.

He noted that any such programs will be totally voluntary and not mandated by DOL or any other government body. “Even though I’ve heard the DOL opinion referred to as groundbreaking, which I think it is from the perspective of the subject matter, it is at the same time well-grounded in guidance issued by DOL back to at least the 1980s,” DeMatties said. “In addition, the program presented under the opinion is optional, there are no requirements, mandates, or even negative implications for a plan sponsor that does not wish to establish a program such as that described in the advisory opinion.”