Calfee, Halter & Griswold LLPPlan Fiduciaries Prevail in ERISA Lawsuit Challenging Plan Investments and Fees

September 8, 2016

Many plan fiduciaries for 401(k) plans have been monitoring the recent surge of excessive fee litigation, in which a broad range of investment decisions made by plan fiduciaries have been challenged as breaches of fiduciary duty. A recent decision from the Northern District of California addressed some of these challenges and perhaps brought some clarity to whether or not certain actions (or inactions) by plan fiduciaries should be considered fiduciary breaches. In White v. Chevron Corp., the district court dismissed an ERISA class action complaint alleging that Chevron Corporation and its investment committee breached fiduciary duties owed to plan participants in choosing investment options that charged excessive fees and underperformed. In granting the defendants’ motion to dismiss, the Court held that the participants did not plausibly allege that the defendants breached their duties of loyalty and prudence by failing to chose alternative investment options with higher returns and lower fees. The sweeping challenge to the Chevron plan included allegations that the defendants: (1) offered a money market fund instead of a stable value fund; (2) offered investment options with excessive management fees; (3) caused the plan to pay excessive administrative fees through an asset-based revenue sharing agreement with Vanguard, the plan’s recordkeeper, and failed to conduct a competitive bidding process for the plan’s administrative services; (4) failed to timely remove the Artisan Small Cap Value Fund as an investment option, despite underperformance compared to similar lower-cost alternatives; and (5) failed to monitor appointees to whom fiduciary responsibilities were delegated. The Court first addressed claims based on alleged breaches of the duty of loyalty, holding that the participants had failed to plead any facts sufficient to raise a plausible inference that the defendants took actions to benefit themselves at the expense of plan participants or that they acted under conflicts of interest. The Court also held that the participants failed to cite any authority for the proposition that causing an ERISA plan to incur unreasonable expenses violates the duty of loyalty in a way that is distinct from violating the duty of prudence. With respect to claims based on the duty of prudence, the Court addressed and ultimately rejected each theory of liability separately.

  • Failure to Offer Stable Value Fund: ERISA does not require fiduciaries to offer a stable value fund as a plan investment option. The Court held that offering a money market fund, instead of a stable value fund, as one of an array of investment options along the risk and reward spectrum more than satisfied the duty of prudence.
  • Offering Funds With Excessive Management Fees: The participants alleged that the defendants (1) imprudently offered retail class shares of mutual funds when cheaper institutional class shares were available, (2) imprudently offered higher-priced non-Vanguard funds when they could have offered less expensive Vanguard funds and (3) imprudently offered mutual funds with higher management fees when they could have reduced expenses by offering separately managed accounts or collective trusts. The Court rejected the contention that mere inclusion of a share class with an expense ratio that is higher than that of the lowest share class − standing alone − violates the duty of prudence, as such an allegation is insufficient to state a claim that fiduciaries failed to consider lower cost options. The participants alleged that the defendants changed investment options from year to year, supporting an inference that the defendants were in fact monitoring investment options. The Court rejected the latter arguments on the basis that the range of fees and breadth of investments offered in the plan fit well within the spectrum other courts have held to be reasonable as a matter of law.
  • Use of Revenue Sharing Agreement: ERISA does not forbid revenue sharing agreements to cover recordkeeping costs. The Court rejected the argument a combination of an asset-based revenue sharing agreement and growth in the plan’s assets necessarily results in unreasonable and excessive administrative fees. The Court also held that there is “no legal foundation” for the argument that ERISA requires periodic competitive bidding with respect to administrative services. The defendants actually renegotiated the revenue sharing agreement after just two years to use a per-participant fee, demonstrating that they were appropriately monitoring administrative fees.
  • Failure to Timely Remove Underperforming Fund: The participants professed that they were not arguing for earlier removal of the Artisan Small Cap Value Fund merely because it lost value, but instead because of its inconsistent performance. The Court rejected that theory because poor performance alone is not sufficient to state a claim that fiduciaries failed to timely remove an investment option, as ERISA requires plaintiffs to plead other objective indicia of imprudence. The Court also rejected the assertion that superior performance of alternative investments indicates that a breach occurred because ERISA judges fiduciary conduct at the time decisions are made and the participants failed to plausibly allege how the defendants could have predicted the fund’s underperformance leading up to its removal as an investment option.

As a result of the failure to state any plausible underlying claim, the Court dismissed the derivative claim alleging Chevron failed to monitor appointed fiduciaries. The Court noted that the participants failed to identify any appointed fiduciaries that Chevron failed to monitor, suggesting that the participants did not actually know whether Chevron delegated fiduciary duties or to whom such duties were delegated. The ultimate impact of the Chevron decision is unclear, as the Court provided the participants an opportunity to file an amended complaint. The Court was very pointed, however, in its opinion that the current theories of the participants suffer from lack of factual support, speculative hindsight analysis and willful refusal to consider other characteristics relevant to the prudence of investment options beyond fees, such as risk profiles and investment strategies: “It is inappropriate to compare distinct investment vehicles solely by cost, since their essential features differ so significantly.” The Chevron decision is another reminder that a well-documented and formal process of monitoring a plan’s investment options, including review of performance and associated fees, will help demonstrate the efforts of fiduciaries to engage in a prudent process and will serve as the primary defense to claims brought against plan fiduciaries.   Sign Up for Future First Alerts>>   —————————————————————————————— For additional information and discussion on this topic, please get in touch with your regular Calfee contact or one of the attorneys listed below:   David T. Bules 513.693.4892 dbules@calfee.com Steven W. Day 216.622.8458 sday@calfee.com   This alert is provided by Calfee, Halter & Griswold LLP for education and information purposes only. This alert is not intended to provide legal advice on specific subjects. The resolution of legal issues depends upon the specific facts of a particular situation and the laws involved and prior results do not guarantee a similar outcome. This alert may be considered advertising under applicable laws. Some links within this alert may lead to web sites. Calfee, Halter & Griswold LLP does not necessarily sponsor, endorse or otherwise approve of the materials appearing in such sites. All trademarks and copyrighted material are the property of their respective owners and the use of such material in this alert, articles, or by Calfee, Halter & Griswold LLP is for informational purposes only and does not indicate sponsorship or endorsement by the trademark or copyright holder of either Calfee or the content of this alert.