The latest twist in 401(k) litigation challenges a plan’s decision to offer a money market option, rather than one with stable value’s higher returns.
The lawsuit, filed last week by St. Louis-based Schlichter, Bogard & Denton, challenges the $19 billion Chevron plan’s decision to offer the Vanguard Prime Money Market Fund, rather than a lower-cost and better-performing stable value fund. The suit claims that the plan’s investment policy statement (IPS) required the Plan fiduciaries to “[u]nderstand[] the risk and return characteristics of each investment option” in the Plan and to offer one investment option that will “provide a high degree of safety and capital preservation.” The IPS also required the Plan fiduciaries to “seek maximum current income ... consistent with preservation of capital and liquidity.”
Despite these requirements, and unlike what the suit claimed was “the vast majority of large 401(k) plans,” Chevron failed to offer a stable value fund that would have provided participants the “maximum current income” while preserving capital and liquidity without any greater increase in risk compared to money market investments.” It noted that, during the period in question, the Vanguard Prime Money Market Fund provided an annual return that was 0.07% — 7/100th of a percent — at its highest and as low as 0.04% — 4/100th of a percent, a return the suit characterized as “microscopically small.”
The lawsuit’s allegations closely mirrored that of one filed earlier this year against the Anthem 401(k) plan, noting that while the plan’s menu was dominated by Vanguard mutual fund offerings, the suit chronicled lower priced, but in all other ways identical, share classes of those same funds. Moreover, while the Chevron plan moved to lower-priced share classes in 2012, the suit claims that those options were available to the plan “many years” before the plan made those changes.
And though the suit acknowledges that Chevron switched to the less expensive but otherwise identical share class of the Plan’s Vanguard mutual funds on April 1, 2012, many years after those share classes were available to the Plan, “inexplicably, and to the Plan’s detriment, Chevron failed to do the same with the above non-Vanguard funds when cheaper share classes continued to be available to the Plan.”
Mutual ‘Attractions’?
As if that weren’t enough, as it alleged in the Anthem case, the suit claims that a plan of Chevron’s size could have negotiated for a separate account version, or a collective trust, of the funds, rather than pay the higher fees associated with the mutual fund packaging. Additionally, the suit challenges the plan’s reliance on revenue-sharing to pay the plan’s recordkeeping fees because, unlike fixed recordkeeping charges, those “asset-based fees increased each year as Plan assets grew from $13 billion to $16 billion, a $3 billion, 22% increase even though recordkeeping services did not significantly change in that time.” Furthering its claims, the suit notes that Chevron failed to conduct a competitive bidding process for recordkeeping for the past six years.
The suit also challenges the performance of the Artisan Small Cap Value Fund which, though it was ultimately removed from the menu, the suit alleges should have been removed sooner.
The complaint was filed in the U.S. District Court for the Northern District of California, and seeks to represent a class of more than 40,000 current and former Chevron workers with account balances in the plan.
