Lawsuit Questions Plan’s Lack of Alternatives to Mutual Funds

The lawsuit filed by Jerome J. Schlichter of Schlichter Bogard & Denton against Chevron Corporation also accuses the firm of not using its negotiating power to obtain lower investment and recordkeeping 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.

NEXT: No consideration of collective trusts and separate accounts

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.

NEXT: Failure to bargain for lower fees

Jumbo retirement plans, such as Chevron’s, have much more bargaining power to negotiate low fees for investment management services than even large plans, the complaint contends. Lower-cost institutional share classes of mutual funds compared to high-priced retail shares are readily available to giant institutional investors or even smaller asset holders that meet minimum investment amounts for these share classes.

According to the lawsuit, from February 2010 until on or about April 1, 2012, Chevron imprudently and disloyally provided participants the more expensive share class of Vanguard mutual funds, even though the identical investment was available to the plan at a much lower cost. The lower-cost shares of these mutual funds were available to the plan many years before Chevron moved to lower-cost share classes for the Vanguard mutual funds in 2012.

In addition, from February 2010 to April 1, 2014, Chevron provided the Artisan Small Cap Value Fund as a plan investment option. As of February 1, 2012, Artisan provided the exact same investment in an Institutional class share, which charged 99 to 100 bps in annual fees, compared to 122 to 124 bps for the Investor class shares, which were the shares in the plan. The lawsuit lists similar complaints with the Artisan Mid Cap Fund and Neuberger Berman Genesis Fund.

“Even though Chevron switched to the less expensive but otherwise identical share class of the plan’s Vanguard mutual funds on April 1, 2012, …inexplicably, and to the plan’s detriment, Chevron failed to do the same with the non-Vanguard funds when cheaper share classes continued to be available to the plan,” the lawsuit alleges.

The lawsuit charges that participants paid far higher fees than they should have, which resulted in receiving lower returns on their retirement investments, and fewer retirement assets to build for the future, than they would have obtained had Chevron performed its fiduciary duties. It contends that because Chevron imprudently and disloyally provided participants the much more expensive versions of the plan’s same mutual fund options during these dates, plan participants lost more than $20 million of their retirement savings through unnecessary expenses.

The lawsuit seeks to enforce defendants’ personal liability to make good to the plan all losses resulting from each breach of fiduciary duty and restore to the plan any profits made through the defendants’ use of the plan’s assets. In addition, the plaintiffs seek to reform the plan to comply with the Employee Retirement Income Security Act (ERISA) and to prevent further breaches of ERISA’s fiduciary duties and other such equitable or remedial relief for the plan as the Court may deem appropriate.