DOL Approves Citi Diverse Asset Program for 401(k)s

According to the regulator, Citi will not violate ERISA fiduciary duties by paying plan fees of diverse asset managers.

The Department of Labor has approved a Citigroup Inc. program that promotes diverse investment management firms for Citibank-sponsored 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.

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“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 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.”

Higher Rates Push Both Congress, Investors to Change Strategy

Long-term investors are looking to rebalance their portfolios while considering investing trade-offs in both equity and bond markets.


Representatives from both political parties have introduced the Fiscal Commission Act. The bill would establish a 16-member commission charged with proposing bills to reduce the U.S. federal budget deficit and keep the country’s debt-to-GDP ratio less than 100%.

Specifically, the bill would appoint 12 members of Congress (three from each party from each house), as well as four experts from outside Congress (appointed by the party leadership from both houses). The panel would make proposals to Congress by a majority vote, provided at least three appointees from each party approve.

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The process of approving the recommendations legislatively would be streamlined: Both chambers would have to vote on any recommendation made by the commission without an opportunity to offer amendments, and a motion to begin debate in the Senate could move forward with a simple majority vote, instead of the 60 votes normally needed.

The bill was proposed by Representatives Bill Huizenga, R-Michigan, and Scott Peters, D-California. Progress on the bill and most other matters in the House of Representatives is currently stalled as the majority Republican Party prepares to nominate a new Speaker of the House, to be elected by the full house.

The proposed legislation comes at a time when total federal debt stands at approximately $33.17 trillion. According to the Federal Reserve, the total debt-to-GDP ratio at the end of 2022 was 119.8%, though this included intra-government debt and debt owed to the Fed itself.

The sensitivity to high federal debt levels and government borrowing is heightened by higher interest rates, which increase the cost of servicing the debt. According to the Department of the Treasury, debt payments consume 15% of total federal spending.

Higher interest rates can also improve returns for investors in government and corporate debt, and they can influence bond and equity investing strategies.

John Croke, the head of active fixed-income product management at Vanguard, says current investor demand for corporate bonds mostly depends on the investors’ time horizon. Long-term investors are “taking advantage of the more attractive levels of yields through rebalancing portfolios to their long-term strategic allocations,” he says, whereas shorter-term investors “have been concentrating their fixed-income exposure in cash, given the attractiveness of very short-term yields, but risk missing out on the diversifying benefit of owning longer-duration, high-quality bonds in the event of an economic or equity market contraction.”

For defined contribution plans, Croke says investment menus are designed to provide options in varying environments and “should not be restructured or re-imagined because we happen to be going through the first meaningful rise in interest rates in 15-plus years.”

For pension plans, Croke adds, “we have seen plan sponsors with disciplined asset-liability strategies take advantage of both higher interest rates and a strong post-COVID equity market to ‘lock in’ funding levels at fairly healthy levels.”

Josh Jamner, a vice president and investment strategy analyst at ClearBridge Investments, says higher Treasury yields can reduce the appeal of equity investing, especially “defensive and growth” equity as opposed to “cyclical and value” equity, which can perform better in a high-interest-rate environment.

He explains that growth and defensive stocks have cash-flow expectations that are more future-oriented and are therefore discounted more against higher rates.

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