Participants claim fees were too high because the plan used actively managed retail funds.

Wal-Mart sued over fees

Retail giant is biggest company to face charges from 401(k) participants

If any executives at large corporations somehow think lawsuits over 401(k) fees are going to quietly disappear anytime soon, they should think again.

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 is bigger than the latest target: Wal-Mart Stores Inc., Bentonville, Ark., the country's largest employer with nearly 1.4 million people in its U.S. work force.

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

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 ... particularly for a massive plan like Wal-Mart's with tremendous potential to leverage economies of scale.”

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

Hardly alone

Wal-Mart is hardly alone in offering retail mutual funds to 401(k) participants. In fact, 50% of defined contribution plans with more than $5 billion in assets offer retail funds to participants, according to a recent survey of large corporations by Greenwich Associates, Greenwich, Conn. That number has declined from 62% in 2005, however.

The retail funds described in the suit, filed by Wal-Mart employee Jeremy Braden, carry expense ratios ranging from 0.3% to 1.59% of assets. Mr. Braden is represented by the law firms Aleshire, Robb & Sivils PC of Springfield, Mo., and Keller Rohrbach LLP of Seattle.

“As a group, many of the largest companies actually have very good plans with very low fees,” said Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, a group representing 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 appears to be looking to recoup at least $60 million for the allegedly excessive fees participants paid during a six-year period ended Jan. 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 dished 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. It automatically contributes 2% of an employee's pay to the 401(k) and another 2% to the profit-sharing plan.

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

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 Group, known for offering relatively low-cost mutual funds. 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% of assets — with Vanguard's International Growth Fund, also an actively managed retail fund with a fee of 0.55% of assets. The difference for Wal-Mart plan participants: $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-year period.

The merits of these claims, and the extent to which Wal-Mart might have breached its fiduciary duties, will ultimately be determined by court trials, where many of the other 401(k) fee suits also appear to be heading 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, said Michael Epstein, partner in the employee benefits practice at law firm Montgomery McCracken Walker & Rhoads LLP, Philadelphia.

Investment performance, process factors too

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,” said Mr. Epstein.

“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.”

Mark Bruno is a reporter for Financial Week, a sister publication of Pensions & Investments.