Wal-Mart Suit Hits 401(k) Fees

    While more than a dozen large companies have been hit with suits from 401(k) plan participants alleging they were charged excessive fees in their company retirement plans, none of these corporations has been bigger than the latest target: Wal-Mart, the country’s largest private employer with nearly 1.4 million people in its U.S. workforce.

    Like many of the other suits that have been filed since 2006 against such big employers as Boeing, Deere & Co. and General Dynamics, the suit against Wal-Mart, which was filed last month, claims the company breached its duties as a fiduciary by allowing its 401(k) plan participants to be charged "unreasonably expensive" fees. The plaintiffs are seeking class-action status.

    The suit alleges the fees were too high because Wal-Mart’s $9.5 billion 401(k) plan offered participants retail mutual funds, as opposed to less expensive institutional funds, "despite the ready availability of reasonably priced options," the claim stated, "particularly for a massive Plan like Wal-Mart’s with tremendous potential to leverage economies of scale."

    Daphne Moore, a spokeswoman for Wal-Mart, says the company is aware of the claim and is currently reviewing it, but declined to comment further.

    Wal-Mart is hardly alone in offering 401(k) participants retail mutual funds. In fact, 50 percent of defined-contribution plans with more than $5 billion in assets offer retail funds to plan participants, according to a recent survey of large corporations by Greenwich Associates. That number has declined from 62 percent in 2005, however, as the fee lawsuits have made more companies aware of just how vulnerable they are to such litigation.

    The retail funds described in the suit, led by Wal-Mart employee Jeremy Braden (represented by the law firms Aleshire Robb & Sivils of Springfield, Missouri, and Keller Rohrback of Seattle), carry expense ratios ranging from 0.3 percent to 1.59 percent of assets.

    "As a group, many of the largest companies actually have very good plans with very low fees," says Judy Schub, managing director of public policy at the Association for Financial Professionals. Schub is also a managing director for the Committee on Investment of Employee Benefit Assets, which is made up of more than 100 corporate pension plan sponsors with $1.4 trillion in combined assets. "But participants are not going to sue a small employer with a small plan—they’re going to go after the biggest companies with the deepest pockets."

    The suit against Wal-Mart, for now, is seeking to recoup $60 million for the allegedly excessive fees participants paid during a six-year period ended January 31, 2007. That’s a pittance compared with the roughly $380 billion in revenue Wal-Mart pulled in last year—as well as the amount it paid out to plan participants: Last year the company contributed $667 million to the 401(k) and profit-sharing plans for more than 800,000 of its employees, as it automatically contributes 2 percent of an employee’s pay to the 401(k) and another 2 percent to the profit-sharing plan.

    The suit against Wal-Mart alleges that the basic fees weren’t the only factor that adversely affected workers’ 401(k) savings. It states that most of the 401(k) plan’s fund options are actively managed funds, which carry higher management fees than passively managed funds that track broad market indexes. The actively managed funds, which cost more because they aim to produce better returns than the markets, often did not meet or exceed their investment benchmarks at Wal-Mart, according to the suit. This underperformance compounded the effect of the fees, as participants paid more for lower returns, the suit argues.

    The suit breaks down the fees on many of the actively managed funds in the Wal-Mart 401(k) plan and measures them against funds from Vanguard, the mutual fund house known for offering relatively low-cost fund options to investors.

    In one example, the suit compares the AIM International Growth Fund—an actively managed retail fund in the Wal-Mart 401(k) plan that has an expense ratio of 1.59 percent of assets—with Vanguard’s International Growth Fund. This fund, also an actively managed retail fund, has a fee of 0.55 percent of assets. The difference for Wal-Mart plan participants: They would have paid $2.8 million less in fees over a six-year period with the Vanguard offering.

    The suit addresses other funds’ fees individually as well, but assesses the performance of the plan in aggregate. Overall, the suit claims, if the Wal-Mart 401(k) had been invested in passively managed Vanguard funds, it would have been worth an estimated $140 million more for the six years ended January 31, 2007.

    The merits of these claims, and the extent to which Wal-Mart may have breached its fiduciary duties, will ultimately be determined by the courts, where many of the other 401(k) fee suits appear to be heading toward trials later this year. And benefits attorneys note that until there are definitive rulings in these cases, more large companies will likely be hit with suits over 401(k) fees.

    The catch for corporate plan sponsors is they cannot simply go out and select only the cheapest funds on the market for their 401(k) plans, says Michael Epstein, partner in the employee benefits practice at law firm Montgomery McCracken Walker & Rhoads. Other factors, such as investment performance and investment process, must be considered as well, he explained. And there will always be less expensive options available to plan sponsors—making the definition of "reasonable" or "excessive" fees subjective, and ultimately leaving corporations vulnerable.

    While there is little companies can do to prevent participants from filing these claims, they are not without ways to protect themselves.

    "It’s not necessarily about choosing the absolute best fund and always making the perfect decision," Epstein says. "It really comes down to showing that there was a process behind your choices, and that you took the appropriate steps to truly make a prudent decision, and one that was justifiably in the best interest of participants."

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