A case against Chevron for breaching its fiduciary duty in its 401(k) plan was thrown out by a district judge for the Northern District of California this week.

White v. Chevron Corp., filed in February on behalf of more than 40,000 plan participants, alleged that Chevron breached its fiduciary duty to plan participants because it charged excessive fees and offered costly and imprudent investment options. The complaint also alleged that the assets of Chevron plan participants were substantially reduced as a result of Chevron’s fiduciary breaches.

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Judge Phyllis J. Hamilton this week dismissed the complaint saying that the plaintiffs didn’t raise a “plausible inference that defendants breached their fiduciary duties and/or duties of loyalty and prudence.”

In the initial complaint, plaintiffs alleged that Chevron breached its duties of loyalty and prudence under the Employee Retirement Income Security Act by providing participants with a money market fund as a capital preservation option, instead of offering a stable value fund; provided ‘retail’ investment options that charged higher management fees than other lower-cost investment options such as collective trusts and separate accounts; and failed to put plan administrative services out for competitive bidding on a regular basis so they paid excessive administrative fees to Vanguard as recordkeeper through revenue sharing from plan investment options.

Bloomberg/file photo

The complaint also said that Chevron retained the Artisan Small Cap Value Fund as an investment option despite its underperformance compared to its benchmark, peer group, and lower-cost investment alternatives.

The defendants argued that the duty of loyalty claims be dismissed because the plaintiffs alleged 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.

No breach of loyalty
Judge Hamilton dismissed the claim that Chevron breached the duty of loyalty to plan participants.

“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.”

Plaintiffs had also accused the defendant of self-dealing, but the court dismissed that allegation as well stating that the plaintiffs didn’t point to any facts that suggested plan fiduciaries engaged in self-dealing or failed to act solely in the interest of plan participants.

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Plaintiffs asserted that Chevron’s 401(k) plan, with over $19 billion in assets, “had substantial bargaining power to demand low fees for investment management services,” but rather than use that bargaining power, the plan used high-cost retail-class shares instead of low-cost institutional-class shares.

As to the allegation that Chevron imprudently provided plan participants with investment options that charged unreasonable management fees, particularly retail-class shares of mutual funds instead of cheaper institutional-class shares, Hamilton agreed with the defendants in that there isn’t a rule that plans must use institutional-class shares.

“Fiduciaries have latitude to value investment features other than price (and indeed, are required to do so), as recognized by the courts,” according to Hamilton. “In particular, where, as here, a plan offers a diversified array of investment options, the fact that some other funds might offer lower expense ratios is not relevant, as ERISA does not require fiduciaries to ‘scour the market to find and offer the cheapest possible funds (which might, of course, be plagued by other problems).”

The complaint also said that Chevron violated its duty of prudence by offering a money market fund as its capital preservation option but the court found that offering the money market fund along with an “array of mainstream investment options along the risk/reward spectrum more than satisfied the plan fiduciaries’ duty of prudence.”

Plaintiffs also alleged that Chevron breached its duty of prudence by paying Vanguard through revenue sharing for two years of the six-plus-year proposed class period instead of on a per person basis and didn’t put its plan up as part of a competitive bidding process to make sure fees were reasonable.

The court said that the plaintiffs did not provide facts proving that Chevron acted unlawfully and “plaintiffs have not alleged facts from which the court can ‘infer more than the mere possibility of misconduct,’ and thus have alleged – but have not shown – that they are entitled to relief.”

Nothing in ERISA requires companies to put their 401(k) plans out for competitive bidding periodically, the court added.

Plaintiffs have until Sept. 30 to file an amended complaint with the U.S. District Court for the Northern District of California. "We will be amending the complaint, as the court allowed. In it we will show in detail how Chevron employees and retirees paid more than 400% more for recordkeeping fees than peer plan participants paid in their plans, and how Chevron employees and retirees lost millions of dollars due to excessive investment management fees compared to comparable investments available in peer plans," said Jerome Schlichter, founding and managing partner at Schlichter Bogard & Denton, the law firm representing the plaintiffs in this case.

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