Chevron Wins Dismissal of ERISA Challenge

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 practitioners.  

Similar to a host of other lawsuits filed against a wide range of employers over the last several years, the complaint, White vs. Chevronaccused 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. Edison to 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.