On May 31, 2017, the U.S. District Court for the Northern District of California granted Chevron Corporation's motion to dismiss a first amended complaint which alleged various breaches of fiduciary duty related to Chevron's 401(k) Plan (the "Plan"). As of December 31, 2014, the Plan had more than $19 billion in assets and over 40,000 participants. Noting that the plaintiffs failed to correct the deficiencies noted by the Court in its prior order, this dismissal was with prejudice. Charles White, et al., v. Chevron Corporation, et al., Case No. 16-cv-0793-PJH.
Plaintiffs, who are participants in the Plan, filed a class action against defendants Chevron Corporation, the Plan's investment committee, and 20 DOEs (who were alleged to be "current and former members of the investment committee"). In granting the defendant's motion to dismiss, the Court reviewed plaintiff's allegations that defendants (1) breached their duties of loyalty and prudence by selecting a money market fund versus a stable value fund in violation of the plan's investment policy statement, (2) caused the plan to pay unreasonable investment management fees, (3) retained a particular fund in the plan that drove investment revenue to Vanguard, (4) caused the plan to pay excessive recordkeeper fees, and (5) failed to monitor fiduciaries.
In short, like most 401(k) suits, the plaintiffs alleged that because defendants selected funds with lower returns and higher administrative and management fees, the value of the their individual accounts decreased. If true, how does a plan fiduciary know if its fees and expenses are reasonable? First, plan sponsors must understand the various fee and expense components of their particular plan. For this initial step, we recommend that the plan sponsor's consider utilizing the 401(k) Plan Fee Disclosure Tool provided by the U.S. Department of Labor.
The DOL has provided the tool in order to help plan fiduciaries understand and determine the "total cost of the plan" by identifying the various investment product, administrative, start-up and termination fees. Once a plan administrator has determined the source of all plan fees and expenses, we recommend benchmarking those fees and expenses via the retention of an investment advisor and / or engaging in a competitive bidding process. By benchmarking plan fees and expenses, plan sponsors will have a better understanding of the reasonableness of their plan's fees and expenses and help ensure that they continue to meet their fiduciary duty to defray the reasonable costs of the plan.
Naturally, the benchmarking process may lead to a change in 401(k) providers, or it may prompt the existing provider to provide alternative funds, share classes, and /or simply improve its pricing to retain the business. Because a 401(k) account balance is likely the plan participant's greatest asset, it is critically important to periodically review and benchmark plan fees and expenses.