Say this for Jerome Schlichter—his timing is impeccable. The star attorney has filed another bombshell lawsuit, this time in the stable value space. Fresh off a filing against Great West Mutual Funds, Schlichter has Chevron Corp. in his sites, claiming a fiduciary breach over the latter’s fees charged in its 401(k) plan.
Specifically, Schlichter, managing partner with St. Louis-based Schlichter, Bogard & Denton, claims Chevron only offered money market funds rather than better performing and lower-cost stable value funds as its sole capital preservation 401(k) menu choice.
“ …unlike the vast majority of large 401(k) plans, Chevron failed to offer a stable value fund that would have provided participants the ‘maximum current income’ while preserving capital and liquidity without any greater increase in risk compared to money market investments,” according to language of the filing.
The suit, brought the case on Feb. 17, once again references fees paid to low-cost passive investment manager Vanguard, as Schlichter did recently with health care provider Anthem and its 401(k) fees.
“Since at least February 2010, Chevron has provided Plan participants as their sole capital-preservation, conservative investment option the Vanguard Prime Money Market Fund, initially in the higher-cost Investor class, despite the Plan’s massive size, and as of April 1, 2012, in the lower-cost Institutional class,” the filing reads. “During that time, the Vanguard Prime Money Market Fund provided an annual return that was 0.07 percent at its highest and as low as 0.04 percent of a percent. That microscopically small return did not even beat the rate of inflation during that time period.”
Some argue that stable value performed poorly throughout 2008 and the aftermath of the economic crisis. However, recent regulatory changes to money market funds are causing a “resurgence” of the product.
“There has been a resurgence in stable value funds,” says Warren Howe, national sales director for stable value markets with MetLife. “There has always been a case for stable value funds over money market funds, but now with the new regulations, it’s even stronger.”
Howe adds that there have been two significant rounds of regulatory changes with money market funds, not only to the structure but also the return. For instance, money market fees were not always counted in the return, and now that they are counted, stable value funds are even better by comparison.
Which appears to be the thrust of the plaintiff’s case; that Chevron “imprudently and disloyally, and in violation of the [investment policy statement], failed to provide a stable value fund as the Plan investment option to ‘provide a high degree of safety and capital preservation.’”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
There are 2 different types of stable value, the high fee, non-transparent insurance company general account has resulted in the MassMutual lawsuit