The US Department of Labor (DOL) recently issued DOL Advisory Opinion 2023-01A, (Advisory Opinion) addressing racial equity and supplier diversity. The Advisory Opinion answered an inquiry about the application of ERISA’s fiduciary duty requirements to an employer’s racial equity program.
The program that the employer proposed is designed to encourage racial diversity in a plan’s asset manager pool. The program does so by providing that the employer will pay some or all of the management fees for diverse managers retained by the employee benefit plans, although the fiduciary committee responsible for selecting plan managers is under no obligation to choose managers from among the program candidates.
In other words, under the program there is no requirement to select any manager (or have a diverse manager quota); however, if a diverse manager is selected, the employer will pay some or all of that manager’s fees, thus lowering the cost to the plans of engaging that manager. This cost reduction to the plans could act as a thumb on the scale for the committee in selecting such managers—even without any mandate, requirement, or quota.
The employer sought the DOL’s opinion on three questions, and the DOL answered each in a manner that found the program to be consistent with ERISA:
- The first question was whether the program caused the employer to be an ERISA fiduciary with respect to the selection of managers. The DOL answered that the program does not, in and of itself, cause the employer to be a fiduciary over the selection of investment managers because the design of the program is a settlor and not a fiduciary act. Likewise, the DOL determined that the pre-selection of certain managers for the program is not fiduciary conduct. Also, the DOL opined that the payment of the management fee to support these diverse managers (if selected after a prudent process) is not a prohibited transaction.
- Second, the employer asked whether the committee could be viewed as breaching its fiduciary duties by taking the program into account in the selection of managers. The DOL answered that consideration of the program would not in and of itself cause the investment committee to breach its fiduciary duties. The DOL emphasized, however, that fiduciary duties remain; for example, the committee must still select managers in accordance with the duty of prudence and the duty of loyalty, and the employer bearing all or a portion of the costs will not alone be enough to survive those tests.
- Third, the employer asked whether including information about the program in participant disclosures would represent “improper influence” by a plan fiduciary. Improperly influencing participants could jeopardize the application of the fiduciary safe harbors that protect fiduciaries from liability for participant investment decision-making. The DOL opined that the inclusion of information about the program would not, in and of itself, constitute improper influence for this purpose.
This Advisory Opinion will be a helpful guide for any plans that have similar diversity programs. Although the DOL is clear that its opinion is limited to this particular program, it may provide comfort for plan sponsors with similarly designed diverse vendor programs.
However, it should be noted that the Advisory Opinion did not address the potential impact of the US Supreme Court’s June 29, 2023 decisions in two cases—Students for Fair Admissions Inc. v. President and Fellows of Harvard College, and Students for Fair Admissions Inc. v. University of North Carolina (the Harvard-UNC cases)—which held that race-conscious admissions policies at Harvard and UNC fail strict scrutiny and violate the Equal Protection Clause of the Fourteenth Amendment.
Since those decisions, other racial equity programs have been challenged under the Fourteenth Amendment and Section 1981 of the Civil Rights Act of 1866 (Section 1981) (which prohibits discrimination in contracting).
Although the Harvard-UNC cases pertain to educational institutions, there is concern that similar legal theories could successfully extend beyond the education sector. For example, there is a possibility that the Harvard-UNC cases might provide an opening for challenges to activities by employee benefit plans, such as supplier diversity programs.
A recent example of this possibility is that in early August 2023, the American Alliance for Equal Rights filed a race discrimination lawsuit in the US District Court for the Northern District of Georgia against several entities affiliated with Fearless Fund Management LLC (Fearless), an Atlanta-based asset manager. In the complaint, the plaintiff made allegations that the asset manager’s grant program, which sought to support Black female business owners, violates Section 1981.
The Fearless claim could signal the type of challenges that might emerge against ERISA benefit plans—including supplier diversity programs—and so the DOL’s recent Advisory Opinion should be viewed through the lens of that landscape.
In light of this, employers may want to consider whether their benefit programs or investment mandates—such as a supplier diversity program—could be viewed as using race-conscious considerations that could be subject to challenge. In short, this is an emerging and evolving area of the law that ERISA fiduciaries should continue to monitor.
For concerns round how these issues may impact ERISA plans or ERISA fiduciary responsibilities, or any questions about the ongoing DOL investigations, please feel free to contact the author or your Morgan Lewis contacts.