The Learning Center Resource Desk regularly receives calls on a broad array of technical topics related to IRAs and qualified retirement plans. Our ERISA consultants routinely guide financial advisors through the Internal Revenue Service (IRS), Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC) rules and regulations that govern retirement plans.

The lawsuit against Chevron over the handling of its $19 billion 401(k) plan offers lessons in effective pension plan governance. In March, Charles E. White, et al., Plaintiffs, v. Chevron Corporation, et al., Defendants, was filed in the Northern District of California by the Schlichter law firm. The main elements of the suit allege that

  • Chevron should have considered non-mutual fund investment options, e.g., collective trusts or pooled separate accounts, as less expensive alternatives to mutual funds.

  • Chevron was not diligent in ensuring that the selected mutual funds were of the lowest cost share class.

  • Chevron’s only capital preservation investment option was a proprietary money market fund with a low rate of return; stable options — presumably with better rates of return — were not considered.

  • Chevron did not follow its own investment policy statement (IPS), which allegedly called for a stable value option.

  • Chevron had not bid out the plan’s recordkeeping services for at least six years. Chevron did not monitor the asset-based revenue received by the recordkeeper.

The allegations illustrate the basic tenets of effective plan governance and strategies to mitigate overall ERISA liability. ERISA requires that plans be administered with the best interests of the participants in mind. ERISA also requires that decision-making be held to an expert standard. In other words, decisions — or lack thereof — made by plan officials are judged by what other fiduciaries would have done in a similar situation.

Using the Chevron case as a template, plan fiduciaries should ask themselves the following questions as a stress test to ascertain if their plan governance processes could prevail against similar allegations.

  • Are we following our plan’s IPS?

  • Are we monitoring the asset-based revenue received by the service providers? Do we periodically put the plan servicing out to bid?

  • Is a competitive capital preservation investment option available, and has the investment been thoroughly vetted?

  • Are we using the most cost-effective share classes?

  • If the plan is of significant size, have we explored using non-mutual fund options, and have we documented the analysis?

If you answered yes to each question and have the documentation to back it up, congratulations because you are more than likely satisfying your ERISA fiduciary duties.

If you answered no to one or more questions, maybe it’s time to review your governance process to see what changes may be necessary

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