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Retiree Inc., produces retirement income planning software for both financial professionals and consumers. The authors’ complete research can be accessed online here.
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An Employee Retirement Income Security Act (ERISA) lawsuit
filed by participants in a Chevron Corporation defined contribution (DC) plan
has been dismissed after a hearing before the U.S. District Court for the
Southern District of California—making for some informative reading for ERISA industry practitioner.
Similar to a host of other lawsuits filed against a wide
range of employers over the last several years, the complaint, White
vs. Chevron, accused the international energy company of failing to use
its negotiating power to obtain lower investment and recordkeeping fees on
behalf of plan participants.
Specifically, the six plaintiffs who filed the proposed class
action alleged that plan fiduciaries “breached their duties of loyalty and prudence
by providing participants with a money market fund as a capital preservation
option, instead of offering them a stable value fund; by providing retail
investment options that charged higher management fees than lower-cost institutional
versions of the same investments; by providing mutual funds that charged higher
management fees than other lower-cost investment options such as collective
trusts and separate accounts; by failing to put plan administrative services
out for competitive bidding on a regular basis, and instead paying excessive
administrative fees to Vanguard as recordkeeper through revenue sharing from plan
investment options; and by retaining the Artisan Small Cap Value Fund as an
investment option despite its underperformance compared to its benchmark, peer
group, and lower-cost investment alternatives.”
Plaintiffs also alleged that Chevron Corporation breached
its fiduciary duty by failing to monitor its appointees’ performance and
fiduciary process, failing to ensure that the appointees had a fiduciary
process in place, and failing to remove appointees whose performance was
inadequate.
One more novel claim was 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.” In the original complaint, 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 gist of the complaint was that the value of the proposed
class members’ retirement accounts would have been greater had defendants
chosen alternative funds or investment options with either higher returns or
lower administrative and management fees (or both), and that based on the
alleged breaches of fiduciary duty, defendants are personally liable to make
good to the plan any losses resulting from their failure to choose investment
options with higher returns and/or lower fees.
NEXT: Tossed for failure
to state a claim
The new ruling from a California district court judge
concludes these allegations are essentially too broad and not tied sufficiently
to real facts or evidence to warrant a full trial. Thus the court granted Chevron’s request
for an order dismissing the complaint pursuant to Federal Rule of Civil
Procedure 12(b)(6) for failure to state a claim.
In its successful motion for dismissal, Chevron argued that the duty of loyalty claims
must be tossed because plaintiffs allege no facts from which disloyalty can
be inferred; that there is no requirement that an ERISA plan offer a stable
value fund; and that plaintiffs plead no facts showing that inclusion of the
money market fund was imprudent. Further, Chevron claimed that plaintiffs “plead
no facts showing that the plan fiduciaries were imprudent in their selection of
the remaining investment options; that plaintiffs do not plausibly allege any
imprudence in the plan's revenue-sharing arrangement with Vanguard; that there
was no imprudence in the timing of the removal of the ARTVX Fund; and that the
monitoring claim thus fails.”
Zooming in on one telling aspect of the successful motion to dismiss, Chevron argued the following: “Defendants contend that the allegations
regarding selection of a money market fund instead of a stable
value fund (first cause of action), regarding the plan's administrative and
investment-management expenses (second and third causes of action), and
regarding the replacement of the ARTVX Fund (fourth cause of action) are ‘prudence’
challenges, with no facts pled showing that defendants acted in the interest of
anyone other than the plan participants and beneficiaries, much less that they
acted in the interest of Chevron or other plan fiduciaries. In short,
defendants assert, plaintiffs cannot proceed with a claim of disloyalty simply by
virtue of having attached a ‘disloyalty’ label to the complaint.”
In opposition, plaintiffs asserted that the duty of loyalty
is “not limited to a prohibition against self-dealing, but rather that it also
includes a duty to cause the plan to incur only reasonable expenses.” They
contend that the complaint sufficiently alleges facts showing that defendants caused the plan
to incur unreasonable expenses for management and administrative services,
thereby asserting breach of the duty of loyalty.
In tossing the claims, the court “finds that the claims
alleging breach of the duty of loyalty must be dismissed [because] plaintiffs
cite no authority in support of the proposition that causing an ERISA plan to
incur unreasonable expenses is a breach of the duty of loyalty, distinct from a
breach of the duty of prudence. Nor does the complaint include such an
assertion. The complaint simply alleges that defendants violated the ‘duties of
loyalty and prudence’ by offering a money market fund instead of a stable value
fund, by offering higher-cost funds rather than less expensive funds, and by
retaining the ARTVX Fund notwithstanding its underperformance.”
NEXT: Other key
points in the decision
The court’s reasoning continues as follows: “The complaint
pleads no facts sufficient to raise a plausible inference that defendants took
any of the actions alleged for the purpose of benefitting themselves or a
third-party entity with connections to Chevron Corporation, at the expense of
the plan participants, or that they acted under any actual or perceived
conflict of interest in administering the plan. Instead, plaintiffs simply
allege in the first through fourth causes of action that ‘Chevron breached its
duties of loyalty and prudence’ under § 1104(a)(1)(A) & (B).
“Nor do plaintiffs in their opposition point to any facts
suggesting that the plan fiduciaries engaged in self-dealing or failed to act solely
in the interest of the plan's participants, or identify any facts plaintiffs
could add to state a claim for breach of the duty of loyalty,” the decision
states. “Because the complaint does not differentiate between breach of the
duty of prudence and breach of the duty of loyalty, and includes no separate
allegations to support the duty of loyalty claim, the court finds the
allegations in the complaint insufficient to sustain the disloyalty claim.”
Looking specifically at questions about whether Chevron
violated ERISA’s distinct duty of prudence, the court’s decision is equally
unsympathetic. Citing a range of cases from Tibble
vs. Edisonto Loomis vs. Exelon,
the decision concludes the complaint “does not allege sufficient facts to show
a breach of the duty of prudence in connection with defendants' selection of
the money market fund as the capital preservation option … Offering a money
market fund as one of an array of mainstream investment options along the
risk/reward spectrum more than satisfied the plan fiduciaries’ duty of
prudence.”
The text of the decision explains the Chevron plan’s investment
policy statement (IPS) provides that “at least one fund will provide for a high
degree of safety and capital preservation;” it further directs that all plan
options must be liquid and daily-valued and promotes participant flexibility in
allocating their accounts. “The inclusion of a money market option is
consistent with the IPS guidance, and plaintiffs’ attempt to infer an imprudent
process from its offering is therefore implausible,” the court ruled.
“Plaintiffs concede that neither ERISA nor the IPS required
that the plan include a stable value fund, do not dispute that some defined
contribution plans include money market funds, that some include stable value
funds, and that some include both money market funds and stable value funds.
Nevertheless, they take the position that it was imprudent for the plan
fiduciaries fail to consider including a stable value fund,” the decision
explains. “However, plaintiffs plead no facts showing that the Plan fiduciaries
failed to evaluate whether a stable value fund or some other investment option
would provide a higher return and/or failed to evaluate the relative risks and
benefits of money market funds vs. other capital preservation options. A
complaint that lacks allegations relating directly to the methods employed by
the ERISA fiduciary may survive a motion to dismiss only if the court, based on
circumstantial factual allegations, may reasonably infer from what is alleged
that the process was flawed. No such inference can be made in this case.”
The full text of the decision is available online here.