Amended Excessive Fee Suit Against Chevron Dismissed

U.S. District Judge Phyllis J. Hamilton in the U.S. District Court for the Northern District of California found that for repeated claims the plaintiffs failed to correct the deficiencies in the original complaint identified by the court in its prior order dismissing the suit.

For the second time, Chevron Corporation has won dismissal of a lawsuit alleging it caused participants to pay excessive fees due to its choices of funds offered in its 401(k) plan.

U.S. District Judge Phyllis J. Hamilton in the U.S. District Court for the Northern District of California found that for repeated claims the plaintiffs failed to correct the deficiencies in the original complaint identified by the court in its prior order dismissing the suit

Hamilton repeatedly noted in her new order that the plaintiffs failed to distinguish between the Employee Retirement Income Security Act’s (ERISA)’s duties of loyalty versus prudence.

Specifically, the six plaintiffs who filed the proposed class action alleged that plan fiduciaries “breached their duties of loyalty and prudence by providing participants with a money market fund as a capital preservation option, instead of offering them a stable value fund; by providing retail investment options that charged higher management fees than lower-cost institutional versions of the same investments; by providing mutual funds that charged higher management fees than other lower-cost investment options such as collective trusts and separate accounts; by failing to put plan administrative services out for competitive bidding on a regular basis, and instead paying excessive administrative fees to Vanguard as recordkeeper through revenue sharing from plan investment options; and by retaining the Artisan Small Cap Value Fund as an investment option despite its underperformance compared to its benchmark, peer group, and lower-cost investment alternatives.”

All of these claims were again dismissed.

However, in their amended complaint, the plaintiffs offered a new claim that “conflicts of interest” arose from the fact that Vanguard both owned significant amounts of Chevron stock, and also was doing business with Chevron as the plan’s investment provider. They assert that defendants could at any time have hired “a pure recordkeeper to provide the same level of services to Plan participants to avoid an arrangement ‘infected by conflicts of interest.'” Plaintiffs contend that Vanguard “holds” $13 billion of Chevron stock, which makes it the largest institutional holder of Chevron stock, and that Vanguard has consistently voted in favor of Chevron management proposals and against Chevron shareholder-originated proposals.

NEXT: Conflicts-of-interest claim

For example, plaintiffs bring a new allegation that defendants were motivated to retain the Artisan Small Cap Value Fund (ARTVX) fund until April 2014 (despite poor performance in 2012 and 2013) in order to drive more revenue-sharing money to Vanguard for its recordkeeping role, allegedly in compensation for its proxy-voting policy. Hamilton found this claim is contradicted by materials on which plaintiffs rely. 

Beginning in 2012 (and before the time plaintiffs claim defendants should have removed the ARTVX Fund from the Plan lineup), all revenue sharing from ARTVX was rebated to the plan. The 2012 recordkeeping agreement that plaintiffs submitted with their opposition states, "Effective January 1, 2012, an administrative fee reimbursement equal to the amount of all fund subsidies (of any kind) received by Vanguard attributable to a plan's investment in the non-Vanguard funds are to be credited to the applicable Plan." 

And even if Vanguard had continued to receive ARTVX revenue-sharing, Hamilton noted in her order, “plaintiffs do not and cannot allege that there were no equivalent small-cap funds paying just as much. Plaintiffs provide no factual basis for their speculation that Plan fiduciaries tolerated ARTVX's alleged underperformance for the purpose of benefitting Vanguard. In short, they allege no facts showing a breach of the duty of loyalty.” 

In addition, plaintiffs added the allegation that unlike plan recordkeeping services, which are paid for by plan participants, the expenses of administering the corporate plans Chevron maintained for its executives were borne by Chevron; and they assert, on “information and belief,” that Vanguard provided “discounted recordkeeping services” for the non-qualified corporate plans sponsored by Chevron for its executives. They claim that Vanguard was able to provide this benefit to Chevron because of “the significant amount of revenue sharing it generated from having plan participants invested in higher cost share classes of its mutual funds as well as other Vanguard investments.”

“At a minimum,” plaintiffs allege, “Chevron’s enabling its largest shareholder, Vanguard, to receive millions of dollars of excessive compensation from employees’ assets paid for recordkeeping the 401(k) plan, positioned Vanguard to be able to offer lower-cost or below-cost services to Chevron for its corporate plans[,]” which in turn, plaintiffs claim, “placed Chevron in a position of conflict of interest by using the same recordkeeper for the 401(k) plan.”

NEXT: Retaining Vanguard as recordkeeper

According to the new order, plaintiffs contend that Vanguard’s practice of regularly voting in favor of Chevron on shareholder resolutions motivated defendants to retain Vanguard as the plan's recordkeeper on a no-bid basis. And they claim that choosing the higher-revenue-sharing Vanguard investments furthered this "scheme" to benefit Vanguard in return for Vanguard's favorable voting of its large holding of Chevron stock.

Hamilton found this attempt to allege breach of the duty of loyalty fails, because the allegations that Chevron had its own interests and the interests of Vanguard at heart, rather than the interests of the plan participants, are entirely speculative, and unsupported by any facts, other than “facts” alleged on information and belief or based on pure conjecture. Further, as defendants argue in their motion, even had plaintiffs alleged that Vanguard’s proxy voting standards or its arrangement with the non-qualified plans influenced Chevron to retain Vanguard or to inflate the plan’s recordkeeping fees, their theories of “conflict” would still be fundamentally inconsistent with the facts alleged in the amended complaint—facts that show that, despite any purported “conflict,” Chevron repeatedly took actions to reduce Vanguard’s fees over the class period, see, e.g., moving to lower-cost share class, recordkeeping fee of $23/participant as of January 1, 2015.

Plaintiffs have alleged no facts showing that the Plan fiduciaries were aware of Vanguard’s allegedly "pro-management" voting position, or that it influenced Chevron’s retention of Vanguard in any way, Hamilton says. As defendants note in their motion, Vanguard, which plaintiffs' counsel has lauded as the "gold standard" in other similar actions (where Vanguard was not the recordkeeper), is a significant shareholder in just about every public company, simply because of its outsized role in index fund investing. Plaintiffs plead no facts showing that Vanguard did anything unique with respect to Chevron; to the contrary, they allege that Vanguard took pro-management positions for all companies across the S&P 500, and as a block, across all of its funds, regardless of whether it provided retirement services to such companies.

Hamilton found that the allegations that Chevron had illicit motives to drive higher recordkeeping fees to Vanguard—that the administration of the plan was infected by "conflict of interests" resulting from Chevron's relationship with Vanguard—are insufficient to state a claim. In particular, plaintiffs allege no facts showing any benefit to Chevron resulting from the plan’s arrangement with Vanguard that Chevron would not have received even absent any such relationship.