by Carol Buckmann
401(k) plan fiduciaries may well feel that they are between a rock and a hard place when picking plan investments. We all know that there are fiduciaries out there who should be following better practices in selecting and monitoring investments, and some who should not be surprised to find themselves defendants in excessive fee lawsuits. However, there are so many current lawsuits challenging investment choices and fees that it sometimes seems that fiduciaries can be sued whatever decisions they make and no matter how diligent they try to be. This seems particularly unfair because investment professionals often don’t agree on the best way to invest.
Complaint Dismissed. We have finally had some good news for embattled fiduciaries. A few days ago, the fiduciaries of the Chevron 401(k) Plan succeeded in getting an excessive fee complaint dismissed-at least for the time being-because it contained conclusions rather than facts sufficient to infer that the fiduciaries had breached their fiduciary duties. (White v. Chevron Corp, 2016 BL 281396, N.D. Cal. August 29, 2016).
Familiar Arguments. Plaintiffs had argued unsuccessfully that the mere facts that the plan offered certain types of investments (a money market fund, retail mutual funds) rather than others (a stable value fund, institutional class funds, collective trusts, separately managed accounts), used revenue sharing to pay plan fees and paid recordkeeping fees that were based on asset levels, not calculated per capita, were per se fiduciary breaches. They also raised failure to monitor claims and said that an underperforming plan fund should have been removed earlier.
The dismissed claims are similar to those raised in other recent lawsuits, and it will be interesting to see whether other courts follow the reasoning in this decision.
Reviewing Fiduciary Decisions. The gist of the Chevron decision is that there is no one “right” investment choice for all plans and no one type of investment is automatically “wrong”. The decision affirmed two standards that should be applied in all fiduciary breach cases: 1. A fiduciary’s decisions should not be reviewed with 20-20 hindsight, but in light of circumstances at the time the decision was made; and 2. Fees are important, but fiduciaries can and should consider factors other than fees in selecting investments. The Court also failed to conclude that Chevron’s later actions in changing share classes and actually replacing the underperforming fund indicated that the prior decisions were wrong. In fact, the Court treated them as showing that the fiduciaries were monitoring the investments.
The claims raised by plaintiffs were rejected for the following additional reasons:
----there were no allegations about the methods used by the fiduciaries sufficient to allow the court to infer that the process was flawed.
----there were no allegations of the specific recordkeeping fees that had been paid, and no benchmark was put forward to establish the amount of reasonable fees.
----ERISA does not require plan fiduciaries to solicit competitive bids on a regular basis.
----Poor performance, standing alone, does not create a reasonable inference that plan fiduciaries failed to adequately investigate or monitor an investment choice.
----Simply stating that the plan paid unreasonable fees, without more, did not support a claim that the fiduciary duty of loyalty had been violated.
What’s Next. This may be a short-lived victory for the Chevron fiduciaries, since plaintiffs were given leave to file an amended complaint by September 30 and there is a low bar for plaintiffs’ claims to survive a motion to dismiss. However, the Court’s language interpreting later investment changes as tending to show that monitoring was occurring rather than constituting acknowledgement of a prior breach should be encouraging to all fiduciaries who are trying to improve their practices. Other courts may well take that position.