Pensions, Fiduciaries and DEI
Investment managers who push or even countenance race preferences could be courting legal jeopardy.
By Jay Rogers
Chad CroweFiduciary duty is the highest obligation the law imposes on asset managers.
It requires a trustee, investment adviser or pension manager to subordinate his interests to the interests of the beneficiary.
Not mostly.
Not when convenient.
Entirely.
A fiduciary who invests a beneficiary’s assets to advance his own political preferences has breached that duty.
The standard is clear and the legal principle settled.
Practitioners have been slow to acknowledge that a fiduciary duty may extend to the Constitution.
They should heed the Supreme Court’s decision in Students for Fair Admissions v. Harvard (2023), in which the court found that race-conscious admissions at Harvard and other universities violated the Equal Protection Clause of the 14th Amendment.
The same legal reasoning implies that trustees who manage public pension funds, state university endowments and other government-adjacent investment pools are subjecting beneficiaries to additional risk if they pursue “diversity, equity and inclusion” by engaging in favoritism on the basis of race or sex.
The Equal Protection Clause provides that no state shall deny to any person the equal protection of the laws.
The Supreme Court has interpreted this to mean that government actors can’t make decisions that discriminate on the basis of race without meeting demanding constitutional standards known as strict scrutiny.
Fair Admissions made clear that racial preferences at universities accepting federal funds can’t survive strict scrutiny.
The investment parallel is direct.
A public pension fund is a state actor.
Its investment committee exercises fiduciary authority delegated by the legislature.
When that committee builds a portfolio by directing capital toward companies on the basis of the racial composition or sex ratio of their boards, managements or employees rather than financial merit, it has made a race- or sex-conscious allocation decision with the assets of beneficiaries who didn’t consent to their retirement funds being used for social engineering.
The Employee Retirement Income Security Act of 1974 governs private-sector pension funds and requires fiduciaries to act solely in the interest of plan participants.
The U.S. Labor Department has issued guidance, revised repeatedly across administrations, on whether “environmental, social and governance” factors, which often include the pursuit of DEI, constitute permissible considerations.
The statutory argument against ESG as the primary driver of investment decisions is strong and central to active litigation, such as Spence v. American Airlines (2024), in which a federal district court found a plausible fiduciary breach claim arising from an ESG-focused 401(k) investment menu.
Public pension funds fall outside Erisa and are governed by state law, but they face something Erisa-covered plans don’t: equal-protection obligations under the Constitution.
A state pension fund that screens investment managers by race or sex has imposed a legally suspect classification on a government contracting decision.
Diversity-focused manager-selection policies haven’t been tested with anything like the rigor the Fair Admissions case applied to university admissions.
They should be, and the legal challenge is closer than most trustees recognize.
Work I’ve done as an expert witness has put me in front of investment committees defending decisions made under ESG frameworks.
They typically offer one of three arguments: that ESG factors are financially material and consistent with fiduciary duty, that diversifying the manager pool produces better financial outcomes, and that trustees have independent political obligations that warrant consideration alongside financial returns.
The first argument tries to sidestep actual risk factors and is empirically contested.
The second is theoretically coherent but collapses in practice.
Objective performance and demonstrated track record are the only criteria that hold up under scrutiny.
The third concedes that trustees aren’t acting solely in the beneficiary’s financial interest and thereby concedes a fiduciary breach.
That third admission adds a constitutional layer.
A trustee who acknowledges he weighed political obligations in instituting or maintaining a DEI program has allowed that he made decisions partially on the basis of race or sex—reasons unrelated to investment performance.
A private trustee breaching fiduciary duty for such political reasons faces statutory liability under Erisa.
The remedy under Section 409 involves restoration of losses to the plan plus removal of the fiduciary.
A public trustee doing the same thing with government assets may face statutory liability and a constitutional equal-protection claim from beneficiaries whose money was managed with an eye to race or sex goals.
For public-plan violations, courts are more likely to award injunctive relief than monetary damages—but beneficiaries can seek prospective relief requiring the fund return to merit-based investment standards.
Fair Admissions concerned only university admissions.
But the core principle—that race-conscious classification by a state actor requires compelling justification and narrow tailoring—applies with equal logic wherever a state actor makes consequential decisions using racial criteria.
In Ultima Services Corp. v. USDA (2023), a federal court enjoined a Small Business Administration program that used race-based presumptions in awarding contracts, finding it couldn’t survive strict scrutiny after Fair Admissions.
Investment management is the next frontier.
Public-pension beneficiaries are a defined class: public employees and retirees who contributed to a system in exchange for a defined benefit.
They’re owed the full return those contributions can generate under prudent management.
When their trustees intentionally divert some of that return to political or social objectives, the beneficiaries have suffered a harm that isn’t merely financial.
Their retirement security has been made a tool for someone else’s agenda.
That’s a fiduciary problem.
For public funds operating under state authority, it may also be a constitutional one.
A trustee who has read Fair Admissions carefully should be asking whether his ESG and DEI investment policies would survive the scrutiny applied to analogous race-conscious programs in education.
Many of them won’t.
Mr. Rogers is president of Alpha Strategies Investment Consulting.
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