Does My 401(k) Plan Really Have to Provide Religious Accommodation?

With the increase of claims of devout religious observance, the impact of individuals’ religious observance is being seen throughout the workplace.  Employers have been required to modify dress codes, grooming and appearance standards and scheduling among other terms of employment.  Must the employer also accommodate requests for retirement plan investment options that comply with an employee’s religious beliefs?  For example, many devout Muslims observe Shariah Law and its Halal investing guidelines, which prohibit investing in alcohol, tobacco, pork, defense/weapons, gambling, pornography and financial firms that charge or pay interest.  Such Shariah-compliant investments are unusual retirement plan investment options.

Title VII of the Civil Rights Act prohibits discrimination on the basis of race, color, religion, sex and national origin in the employment relationship.  This prohibition applies equally to employer provided retirement plans.  In 1978, the Supreme Court in City of Los Angeles, Department of Water and Power v. Manhart held that Title VII prohibited the charging of higher pension contributions to female employees, despite the statistical difference in life expectancies.

Originally, Title VII only prohibited religious discrimination in the workplace, but did not require religious accommodation.  The Equal Employment Opportunity Commission (EEOC) introduced religious accommodation in its 1967 regulations instructing employers “…to make reasonable accommodations to the religious needs of employees and prospective employees where such accommodations can be made without undue hardship on the conduct of the employer’s business.”  After court challenges to the regulations, Congress amended Title VII to include religious accommodation.  In TWA v. Hardison and Ansonia Board of Education v. Philbrook the Supreme Court held that employers have no obligation to accommodate religious practice if the accommodation causes more than a de minimus business hardship and that, should the employer decide to accommodate, the employer’s chosen accommodation will supercede employee preferences.

The Supreme Court decisions and the EEOC rules on the question of what an employer owes an employee in the way of religious accommodation in the workplace differ significantly. The Court’s decisions require only de minimus hardship to the employer while the EEOC guidance requires that the employer review every reasonable alternative before determining that a religious accommodation presents an undue business hardship.  Clearly, following only the Supreme Court decisions exposes an employer to the risk of litigation with the EEOC wishing to impose more strict standards.

An employer may accommodate the religious observance through one of a number of alternatives.  The employer may introduce a fund or funds into the investment menu that comply with the employees’ religious practices, if the Plan’s investment advisor can identify and include any such funds that fit within the Plan’s investment guidelines and perform within acceptable parameters. This accommodation can likely be made with no more than a de minimus hardship to the employer.  If, however, no acceptable Halal or other religiously acceptable fund can be identified, then offering such a fund is not advisable, as it may violate the Trustee’s fiduciary duties to select appropriate investment options.

Alternatively, the Plan may offer a “brokerage window” to all participants in the Plan.  A brokerage window is an option through which participants may self-direct the investment of their account balance in one or more of any publicly traded securities rather than just the Plan’s limited investment window.  This would allow those with a religious objection to the investment menu options to invest, through the brokerage window, in acceptable funds available anywhere in the market.  Brokerage windows do not come without drawbacks, however, including higher fees, confusion among all but the very sophisticated investors, the creation of a day-trader mentality and difficulty complying with Department of Labor fee disclosure regulations.

Brokerage windows may also open the employer and trustee up to additional litigation risk, as they have not been able to vet all investment options and determine their suitability.  Courts are divided on whether the plan and the trustee receive any fiduciary protection from investment risks that they typically get when utilizing self-directed accounts limited to a selected investment menu.

In either case, offering some accommodation is likely better than taking no action.  The DOL has made a priority of pursuing religious accommodation cases over the last few years. If an accommodation can be made with minimal hardship, the employer would be wise to implement such an accommodation.

More Posts by View All