The recent dismissal of a lawsuit against fiduciaries of Chevron Corp.’s 401(k) plan raises the question of whether the decision will be a forerunner for the barrage of similar litigation pending across the country. 

Jason Roberts, CEO of the Pension Resource Institute and the Retirement Law Group, is hoping so. 

“I’m pleased to see the court recognizing that costs in a vacuum are meaningless unless they are so far out of line to be considered outliers,” says Roberts. “That was simply not the case here.” 

The decision

Judge Phyllis Hamilton, chief judge for the U.S. District Court for the Northern District of California, dismissed five claims brought under the Employee Retirement Income Security Act by participants in Chevron’s 401(k) plan. 

Allegations ranged from the imprudent use of retail-class shares of mutual funds in lieu of cheaper institutional shares, to the use of an allegedly low-yielding money market fund instead of a stable value fund, and the allegedly unreasonable cost for recordkeeping services paid to Vanguard under revenue-sharing agreements. (Vanguard was not named as a defendant in the claim.)

Throughout her decision, Hamilton reasoned the allegations levied by the plaintiffs’ attorneys lacked supporting evidence. 

The claim alleged breaches of ERISA’s prudence and loyalty standards. 

The claims alleging disloyalty, or that plan fiduciaries were putting their own interests ahead of plan participants’, were dismissed because the plaintiffs cited “no authority” that says unreasonable expenses constitute a breach of loyalty. The plaintiffs merely alleged the loyalty breach, wrote Hamilton. 

And on the issues alleging imprudent management of the plan, Hamilton also ruled that the plaintiffs’ allegations lacked supporting evidence.

Typically, there is a “low bar” for plaintiffs’ claims to survive a motion to have a case dismissed, noted Carol Buckmann in a blog post, an ERISA attorney that counsels plan sponsors and a founding partner of New York City-based Cohen and Buckmann. 

But in the Chevron decision, Judge Hamilton seems to have raised that low bar. On the issue of whether plan participants paid unreasonable recordkeeping fees via revenue-sharing agreements, she ruled that that “are no facts alleged showing what recordkeeping fees Vanguard charges, so it is not clear on what basis plaintiffs are asserting that the fees were excessive,” according to the decision. 

Regarding the bar that plaintiffs’ allegations must exceed to survive a motion to dismiss, Hamilton wrote: “A complaint that lacks allegations relating directly to the methods employed by the ERISA fiduciary may survive a motion to dismiss only ‘if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed’.” Hamilton was quoting a 2012 appellate decision in St. Vincent v. Morgan Stanley Investment Management Co. 

Has the bar to survive dismissal been raised? 

The question of whether or not the Chevron decision will raise the bar for plaintiffs’ claims to survive a motion to dismiss in similar 401(k) excessive fee claims remains to be seen, said Buckmann, who writes regularly about ERISA litigation, in an interview. 

Judge Hamilton has given the plaintiffs in the Chevron case until September 30, 2016, to amend their claim. 

“I think an amended complaint is almost certain to be filed, and we will not really know whether the bar has been raised until we see it and how the judge rules,” said Buckmann. “This is only one court, so we also need to see whether other judges follow (Judge Hamilton’s) reasoning. Facts alleged by plaintiffs are assumed correct for purposes of these motions without discovery, but this judge is saying that mere conclusion are not facts.” 

From his perspective, Roberts finds the most recent generation of 401(k) lawsuits to be unsettling. 

“I’ve had a number of small plan sponsors ask about terminating their plans because they’re reading about another plan being sued on a weekly basis,” he says. “While there are certainly some bad actors who deserve to be sued, these splitting-hair cases are doing a disservice.” 

Roberts notes a common thread among the complaints filed this year has been a failure to recognize the various levels of services participants receive based on a particular plan’s needs. 

“This is dangerous and counterproductive,” says Roberts of the recent trend. “Recent settlements, and even some interpretations of the opinions in favor of plaintiffs in other cases, are seen as a signal that low fees are dispositive of fiduciary prudence.” 

That presumption — that sponsors can best protect themselves from offering the lowest cost plan — may encourage sponsors to offer a “low-cost-at-all-cost” plan, potentially stripping valuable services participants can benefit from, says Roberts. 

“In my mind, that creates more risk, as the plan sponsor is getting less third-party support in the form of plan governance, operation and administration,” he adds. “Participants in bargain basement plans receive less handholding and have few resources to help them properly plan and save for retirement.” 

Moreover, under ERISA, fiduciaries are required to be prudent, not perfect, notes Roberts. “It’s refreshing to see the Chevron case thrown out based upon sound application of basic pleading standards.”