401(k) Plan Sponsor ERISA Fiduciary Litigation Update: White v. Chevron Corporation

by K&L Gates LLP

K&L Gates LLP

On August 29, 2016, the District Court for the Northern District of California dismissed the lawsuit filed against Chevron Corporation by several participants in the Chevron Employee Savings Investment Plan (the “Plan”).  This is an important decision as it is the first decision in the “second” wave[1] of lawsuits filed against 401(k) plan fiduciaries during the past year under the Employee Retirement Income Security Act of 1974 (“ERISA”) for failure to properly manage 401(k) plans.  In dismissing the case, the court rejected a number of claims commonly raised in these lawsuits:

Capital Preservation Fund
The plaintiffs alleged that the Plan’s fiduciaries breached the fiduciary duty of prudence under ERISA because (1) they selected a money market fund as the Plan’s capital preservation fund rather than a stable value fund, which would have provided a greater, guaranteed return and (2) the selection was inconsistent with the Plan’s Investment Policy Statement. 

The court stated that in order for this claim to succeed, the plaintiffs must allege facts that raise an inference that the process used by the Plan fiduciaries to select the capital preservation fund was imprudent, which the plaintiffs did not do.  The court rejected the plaintiffs’ focus on the relative performance of money market funds and stable value funds as an “improper hindsight-based challenge to the Plan fiduciaries’ decision-making.”

With regard to the Investment Policy Statement, the court stated that the Investment Policy Statement did not require that the Plan fiduciaries select a stable value fund for the Plan’s capital preservation fund.  Rather, the Investment Policy Statement simply required that the capital preservation fund must provide for a high degree of safety and capital preservation, must be liquid and daily valued, and must promote participant flexibility in allocating accounts.  The selection of a money market fund was consistent with those requirements.

Excessive Investment Management Fees
The plaintiffs alleged a series of claims with an underlying theme that the investment funds selected by the Plan fiduciaries were too expensive:  (1) the Plan fiduciaries had selected higher-cost retail class mutual fund shares rather than lower-cost institutional class chares, (2) other investment funds with lower expense ratios could have been selected, and (3) the Plan fiduciaries chose mutual funds rather than alternative funds such as separately managed accounts or collective investments trusts, which, in light of the Plan’s size and attendant bargaining power, the fiduciaries could have accessed at lower cost.

The court rejected all of these excessive cost claims.  It noted that ERISA fiduciaries not only may, but have a duty, to consider more than simply cost when selecting investment funds and that fiduciaries may chose more expensive options for a variety of different reasons (e.g., greater liquidity or anticipated superior performance).  The court reiterated what has been said by a number of other courts — i.e., that fiduciaries do not have duty to “scour the market to find the cheapest possible funds.”  Moreover, a focus on the costs of one specific fund may be inappropriate to the extent it fails to consider the role of the fund in a broader investment array, in which a mix of different funds with higher and lower costs may be appropriate.  The court observed that the Plan fiduciaries had changed the available investment options from year-to-year, which suggested that the fiduciaries were indeed monitoring the funds and engaging in a process for evaluating cost.  It also noted that the expense ratios of the funds ranged from 0.05% to 1.24%, which “fits well within the spectrum that other courts have held to be reasonable as a matter of law.”

Excessive Recordkeeper Compensation
The plaintiffs alleged that the Plan’s recordkeeper received excessive compensation principally as a result of (1) its collection of revenue sharing from the Plan’s mutual fund investments and (2) the failure of the Plan’s fiduciaries to periodically bid out the recordkeeping work, which would have forced the recordkeeper to compete on (and, thus, reduce) the price for its services.  The court rejected the revenue sharing claim because the plaintiffs had not provided any facts alleging that the total amount of revenue sharing collected by the recordkeeper was excessive.  The court affirmed the principal that allowing a recordkeeper to retain revenue sharing as part of its compensation for providing services is not per seimproper or unreasonable.  The court noted that after two years of allowing the recordkeeper to collect revenue sharing, the Plan fiduciaries changed the compensation arrangement to use lower cost fund classes (with lower revenue sharing payments to the recordkeeper) and to compensate the recordkeeper based on a per-participant fee formula, which suggested that the fiduciaries were in fact monitoring the amount of revenue sharing that was being paid to the recordkeeper.  The court also rejected the claim that the failure to periodically bid out recordkeeping services was a breach of fiduciary duty because the plaintiffs had provided no evidence that Plan fiduciaries could have obtained less expensive recordkeeping services by doing so.  The court dismissed any notion that ERISA fundamentally requires a periodic competitive bidding of services.

Failure to Remove Imprudent Fund
The plaintiffs alleged that the Plan’s small cap value fund, which had been offered from February 2010 through April 2014, should have been removed long before April 2014 because of its excessive investment management fees and its underperformance relative to its benchmark index.  The court rejected this claim, stating that it may not be unreasonable for a fiduciary to retain an investment option during a period of underperformance.  Mere underperformance is, alone, insufficient to state a claim of breach of fiduciary duty, as is an allegation that other funds would have performed better.  The court again emphasized the need to evaluate fiduciary decision-making at the time of the investment and not in hindsight.  As the plaintiffs did not allege facts to suggest that the Plan fiduciaries could have predicted the fund’s poor performance, this claim was dismissed.

Duty to Monitor
The plaintiffs alleged that the employer breached the ERISA duty of prudence by failing to monitor the Plan’s fiduciaries that it appointed.  The court dismissed this claim because the plaintiffs had not identified which fiduciaries the employer had failed to properly monitor or alleged any facts that showed how the monitoring process was deficient or that gave rise to a reasonable inference of such a deficiency.

This case is a significant win for plan sponsors in the 401(k) fiduciary litigation battle.  As it can be costly for plan sponsors to fully litigate these cases on their merits, it often becomes important for plan sponsors to get these cases dismissed early in the proceedings.  A failure to do so increases the financial pressure to settle — even when the prospects are good for successfully defending the claims on their merits.

The court makes clear repeatedly that there are few, if any, per se fiduciary breaches with respect to 401(k) investment management decisions.  Accordingly, in order to survive early dismissal, plaintiffs will need to do more than make summary allegations of breach; rather, they will need to allege specific facts that give rise to a “reasonable inference” of wrongdoing.  Moreover, as is well settled, those facts must be oriented toward a failure of the decision-making process rather than to a hindsight analysis of results.  Plaintiffs who cannot allege those facts will have difficulty getting a court to engage in a fulsome evaluation of an alleged fiduciary breach.  In this way, this case, like many court decisions that preceded it, highlights the importance of “procedural diligence” for 401(k) plan fiduciaries.  Those who engage in a process of reasoned decision-making, and who document the process, the decision and the rationale for the decision are well positioned to survive claims of breach of fiduciary duty regardless of the outcome of the decision.

[1] The “second wave” of litigation refers to the lawsuits filed against 401(k) and 403(b) plan sponsors beginning in the latter part of 2015 and throughout 2016.  A “first wave” of litigation was commenced against nearly two dozen plan sponsors during 2006–2008.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.