The hope that lawsuits against 401(k) plans and providers would subside was dashed by the most recent class action suit filed against Chevron by the most prolific plaintiff’s firm, Schlichter, Bogard & Denton, on behalf of 40,000 former and current Chevron workers. Like the recent suit filed against Anthem Health, the suit alleges, among other things, that fees paid to their record keeper, Vanguard, were too high which is ironic because Vanguard is known as the industry’s low cost provider.
The suit alleges that not only were cheaper share classes for the same funds available from Vanguard costing their workers $20 million but that other investment vehicles like separately managed accounts (SMAs) and collective trusts (CITs) were open to plans of Chevron’s size. In addition, the inclusion of Vanguard’s Money Market Funds, which have very low returns in a low interest environment, rather than stable value which are present in 80% of plans like Chevron’s and a vast majority of 401(k) plans, cost participants another $130 million.
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ALERT: RELATED WEBINAR(FREE) – Rash of 401(k) Lawsuits – Navigating Dangerous Waters – Wednesday, March 9, 2016 4:00 pm. [button color=”green” size=”medium” link=”https://trauniv.webex.com/mw3000/mywebex/default.do?nomenu=true&siteurl=trauniv&service=6&rnd=0.02758035468939324&main_url=https%3A%2F%2Ftrauniv.webex.com%2Fec3000%2Feventcenter%2Fevent%2FeventAction.do%3FtheAction%3Ddetail%26confViewID%3D1755217729%26%26EMK%3D4832534b000000024cc6ca0c598c4e7b665ce22061a136d749701ae5762c0a1c05f9977d8d4a4783%26%26encryptTicket%3DSDJTSwAAAALlYfyyvjNL6er_eh_G5hRHZwFSzw5p5sKCETYMrWjSKw2%26%26siteurl%3Dtrauniv” ]FREE REGISTRATION[/button]
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The suit puts companies sponsoring defined contribution (DC) plans like 401(k) plans and their service providers in a difficult position as described by top ERISA attorney David Levine. Do fees have to be reasonable or do they have to be the cheapest available? Even if Chevron had negotiated the best deal possible by getting a cheaper share class, should they have used SMAs or CITs? And what was the best deal available to them?
Additionally, should plan sponsors be second guessed on the use of Money Market Funds, which are a safe way for participants who are risk averse to preserve their capital rather than stable value funds? Just recently, a provider was sued by participants in a client’s plan for the inclusion of proprietary stable value funds.
Regardless, expect more lawsuits because, even if plan sponsors and providers think they can ultimately prevail, many will settle to avoid the costs and publicity. The key for plan sponsors is learning what are the major litigation triggers, how to protect against them and how clean up lingering issues – the theme of a 401kTV webinar led by David Levine from the Groom Law Group, Thomas Clark, a former Schlichter associate, and Tom Kmak CEO at Fiduciary Benchmarks on March 9th at 4:00 ET for 401kTV subscribers. These lawsuits once focused just on larger plans, are and will be problems for DC plans of all sizes.
