Lawsuit Accuses Chevron of Not Using Negotiating Power for 401(k) Fees

A new lawsuit claims that by providing participants the Vanguard Prime Money Market Fund instead of a stable value fund, as represented by the Hueler Index, from February 2010 to September 30, 2015, Chevron Corporation caused its 401(k) plan, participants and retirees to lose more than $130 million in retirement savings. 

Since at least February 2010, Chevron has provided plan participants as their sole capital-preservation, conservative investment option the Vanguard Prime Money Market Fund, initially in the higher-cost Investor class, and as of April 1, 2012, in the lower-cost Institutional class. During that time, the Vanguard Prime Money Market Fund provided an annual return that was 0.07% at its highest and as low as 0.04%. The lawsuit says “that microscopically small return did not even beat the rate of inflation during that time period.” 

In the complaint, the Hueler Analytics Pooled Fund Comparative Universe (Hueler Index) data was used to show the returns of the funds in the Hueler Index have far exceeded the returns of the Vanguard Prime Money Market Fund in the plan. The Hueler Index shows stable value funds dramatically outperformed the plan’s money market fund—up to 67 times the return of the Vanguard Prime Money Market Fund.

The lawsuit also questions Chevron’s lack of investigation into non-mutual fund alternatives, such as collective trusts and separately managed accounts. “Holders of large pools of assets know that these investment vehicles are readily available to them and can be used for the same investment style and with the same portfolio manager, but are much less expensive,” the compliant says. Each mutual fund in the plan charged fees far in excess of the rates Chevron could have obtained for the plan by using these comparable products, according to the lawsuit.

The complaint quoted the United States Department of Labor’s Study of 401(k) Plan Fees and Expenses, which says separate accounts can “commonly” reduce “[t]otal investment management expenses” to “one-fourth of the expenses incurred through retail mutual funds.”

The complaint also notes that collective trusts also provide much lower investment management fees than the plan’s mutual funds, and in some instances, separate accounts. “Collective trusts are a common investment vehicle in large 401(k) plans, and are accessible even to midsize plans with $100 million or more in total plan assets, an amount which is a tiny fraction of the size of the Chevron plan,” the compliant says, stating that the Chevron plan has assets around $19 billion. The complaint notes that Vanguard offers low-cost collective trust funds to qualified retirement plans in several asset styles, including large-cap domestic equities, small-cap equities, international equities, and target-date funds.

The lawsuit also claims the plan’s recordkeeping fees were excessive in part because Chevron failed to monitor and control the amount of asset-based revenue-sharing fees Vanguard received. From February 2010 through March 31, 2012, Chevron caused the plan to compensate Vanguard for its recordkeeping services with assed-based revenue sharing of the annual expenses of the plan’s investment options instead of a fixed recordkeeping fee. “Chevron could have and should have capped the amount of revenue sharing to ensure that excessive amounts were returned to the plan but failed to do so. As a result, the plan therefore paid millions of dollars in excessive recordkeeping fees from February 2010 through March 31, 2012” the complaint contends.

The lawsuit also accuses Chevron of failing to conduct a competitive bidding process for the plan’s recordkeeping services within the past six years, which it says would have produced a reasonable recordkeeping fee for the plan.