The recent dismissal of an excessive-fee lawsuit against fiduciaries of Chevron Corp.'s 401(k) plan is a significant defeat for plaintiffs' attorneys and a rebuke to several recurring arguments they've made in such litigation, according to fiduciary experts who follow these cases.
The lawsuit, White et al v. Chevron Corp et al, is notable because Jerome Schlichter — a lawyer prominent in retirement-industry circles for having pioneered excessive-fee litigation over the past decade — is helming the fight against Chevron.
Excessive-fee litigation, which has proliferated since the start of the year, has drawn multimillion-dollar settlements from major corporations such as Lockheed Martin Corp., Boeing Co. and Cigna Corp. Mr. Schlichter, managing partner of the law firm Schlichter Bogard & Denton, has won more than $300 million in aggregate settlements.
However, the Chevron dismissal on Aug. 29 demonstrates not all 401(k) fee cases stand on solid ground, according to Marcia Wagner, principal of The Wagner Law Group.
“It's a big loss, I'd think, to Schlichter because he's been winning,” she said. “And now defense lawyers will be pointing to the Chevron case to make the argument that not all 401(k) fee cases have merit, that you don't have to get the lowest-cost investment options.”
Plaintiffs alleged fiduciaries failed to replace underperforming funds, and caused unreasonable fees to be paid for investment management, due to selection of retail-share-class funds when lower-cost institutional funds were available, and for plan administration due to excessive revenue-sharing payments made to the record keeper.
These are “standard arguments” made by the plaintiffs' bar, and district judge Phyllis Hamilton in the Northern District of California “came down decidedly for the defense,” Ms. Wagner said.
“This suit is a biggie because it has all of [Mr. Schlichter's] popular theories, and it's knocked them down,” said David Levine, principal at Groom Law Group. “It's a complete repudiation of their claims.”
Duane Thompson, senior policy analyst for fi360 Inc., a fiduciary consulting firm, agreed.
“In terms of the judge's decision, it was a shutout for the defendants,” he said. “The judge didn't buy any of the plaintiffs' arguments.”
Several judges have allowed cases to proceed past the motion-to-dismiss stage in the past. However, the vast majority don't end in a full trial, with many parties opting to settle.
Judge Hamilton struck down several arguments due to her finding of a lack of facts sufficient to prove the allegations.
The court has allowed plaintiffs to file an amended complaint by Sept. 30, and Mr. Schlichter plans to “set out in greater detail how the fiduciaries breached their duty, and how that caused harm to the Chevron employees and retirees,” he said.
Chevron, whose 401(k) plan has more than $19 billion in assets, is among the largest plans in the country, and plaintiffs will show that the plan is an outlier among peer plans in terms of outsized record-keeping and fund fees, Mr. Schlichter said of his plan of attack.
“We fully expect this case will proceed to trial down the road,” he said.
Mr. Schlichter also batted down claims the ruling would have an adverse effect on future litigation, saying the dismissal would carry “little weight” if the Chevron suit ultimately gets the green light.
In the meantime, the judge's reasoning could prove helpful to plan sponsors and their defense attorneys, according to Jason Roberts, chief executive of the Pension Resource Institute, an ERISA compliance consulting firm.
“It bodes well because the decision here was reasoned, and incorporates recent precedent and what we've relied upon for 40 years,” he said. “I think it's helpful and will show you have a higher burden to drag someone into court.”
Of course, as Mr. Roberts points out, even though the decision could be cited as precedent by defense, other courts aren't bound by the decision.
“I think it's bad [for Schlichter], but at the same time we should not overreact in either direction,” said Mr. Levine. “I'm happy to see the court's logic here. But it's one court in one circuit.”
The past few months have been particularly busy for excessive-fee lawsuits. Two major brokerages, Edward Jones and Morgan Stanley, were sued last month. Other financial services companies such as Neuberger Berman, Franklin Templeton, New York Life Insurance Co. and American Century Investments have also been targeted since June.
Mr. Schlichter also drastically expanded the scope of such litigation when he sued at least 12 universities, such as Yale University, Duke University, Columbia University and New York University, over the span of a week and a half in August. Those were the first suits filed against fiduciaries of university 403(b) plans, which are 401(k)-type plans for nonprofit institutions.