Wal-Mart, Merrill Lynch settle 401(k) fee suit

The settlement reached this month in the excessive-fee suit involving Wal-Mart Stores Inc.'s 401(k) plan is on a par with other recent settlements.

Wal-Mart Stores and Merrill Lynch agreed to pay a combined $13.5 million to settle the class-action lawsuit brought by participants in the retailer's $14.9 billion 401(k) plan over alleged excessive investment fees and other alleged violations under the Employee Retirement Income Security Act.

The two companies also agreed to remove certain types of retail mutual funds from Wal-Mart's 401(k) plan and consider offering more index funds as investment options.

Wal-Mart, Bentonville, Ark., has the nation's largest private-sector 401(k) plan in terms of the number of participants — 1.2 million — and the case “was closely followed” by plan executives and others in the 401(k) community, said Richard D. Glass, president of Investment Horizons Inc., Pittsburgh, whose focus includes development of retirement plan communications.

While the settlement “seems par for the course” in terms of similar cases, Mr. Glass said it's “a tiny amount (of money) compared to all the fees paid for active management” through the investment choices offered by the plan.

“I thought these guys (participants) had a great case,” he said. “I was shocked they settled for $13.5 million.”

In 2010, General Dynamics Corp., Falls Church, Va., and Fiduciary Asset Management agreed to pay a combined $15.15 million to settle a class-action lawsuit alleging General Dynamics violated its fiduciary responsibilities by allowing Fiduciary Asset Management to charge excessive fees to participants in two 401(k) plans, whose combined assets totaled $6 billion.

Also in 2010, Caterpillar Inc., Peoria, Ill., agreed to pay $16.5 million to settle allegations that included charges the company violated its fiduciary duty by offering investment options with excessive management and other fees and failed to disclose administration costs for four 401(k) plans then with combined assets of $6.35 billion.

In the Wal-Mart settlement, the payments would go to the Wal-Mart Profit Sharing and 401(k) Plan under the settlement given preliminary approval Dec. 5 by Judge Gary A. Fenner in U.S. District Court in Kansas City, Mo.

Wal-Mart agreed to pay $3.5 million, while New York-based Merrill Lynch, the plan's trustee and record keeper and a unit Bank of America Corp., Charlotte, N.C., agreed to pay $10 million.

Other terms of the settlement seek to further a “goal to offer investment options with fees that are reasonable,” the preliminary agreement states.

Under the terms, Wal-Mart and Merrill Lynch agreed the plan's retirement committee, for a period of two years, would:

• add “when appropriate” low-cost passively managed funds besides the two index funds the plan now offers — a BGI Russell 1000 Index Trust and a BGI Barclays Russell 2000 Index Trust. The trusts had, respectively, $2.5 billion and $712 million in assets as of Jan. 31, 2011, according to the plan's form 5500 form. (BlackRock acquired BGI in 2009.)



• continue to remove retail mutual funds that charge participants 12b-1 fees and funds that provide revenue sharing or that pay fees to Merrill Lynch as trustee or record keeper;




• retain an independent fiduciary to provide recommendations on selection and monitoring of investment options, and review any consultant and investment adviser for conflicts of interest;




• offer participants web-based tools for comparing investment options' costs, such as through the Securities and Exchange Commission's cost calculator; and




• make available to participants web-based investment education resources, including a retirement planning calculator.

In the General Dynamics and Caterpillar settlements, the companies also agreed to implement changes to their plans, including improving fee disclosures and communications with participants. Caterpillar also agreed to exclude retail mutual funds as core investment options for a period of time.

According to the settlement, the Wal-Mart and Merrill Lynch settlement payments will be used to “offset future plan expenses and administration fees on a planwide basis.” In addition, plaintiff attorneys, led by the law firm Keller Rohrback LLP, Seattle, will specify in the allocation of the settlement payment “how such payments will reduce the amount of such fees that otherwise would be charged to then-existing individual plan participant accounts,” the settlement states.

“The participants get nothing” directly, Mr. Glass said. “The people who were taken to the cleaners were not helped, meaning participants.”

The plaintiffs alleged Wal-Mart violated ERISA and breached its fiduciary duty by offering retail mutual funds instead of less-expensive institutionally priced funds, even though the plan was big enough to negotiate lower fees.

“This case alleged that certain fees and expenses charged to the plan and to participants by mutual fund companies and collected by Merrill Lynch were excessive in light of the size of Wal-Mart's plan and were not properly disclosed,” Derek W. Loeser, an attorney at Keller Rohrback, wrote in an e-mail about the settlement.

“These fees caused relatively small reductions in each participant's retirement savings account on a year-to-year basis but, over time, caused or could have caused large decreases in long-term retirement savings for participants,” Mr. Loeser wrote.

“The settlement is good for participants,” said Edward A.H. Siedle, who also was an attorney for the plaintiffs and is president of Benchmark Financial Services Inc., an Ocean Ridge, Fla.-based firm whose focus includes forensic investigation of investment fiduciary services.

The Wal-Mart plan “has significantly improved” and “has lower costs and improved investment options.” He declined to provide details.

Wal-Mart, Merrill Lynch and other defendants “deny any liability or wrongdoing” alleged in the lawsuit and “believe that they acted at all times reasonably and prudently and in compliance with ERISA with respect to the plan, their participants and beneficiaries,” according to the agreement.

They agreed to “the settlement solely to avoid the cost, disruption and uncertainty of litigation,” the agreement stated.

Mr. Fenner, the judge, scheduled a hearing for March 7 on the fairness of the settlement agreement.

The lawsuit, initially filed March 27, 2008, against Wal-Mart and Wal-Mart executives, was subsequently dismissed on Oct. 28, 2008, by Mr. Fenner. The U.S. Court of Appeals for the 8th Circuit, St. Louis, reversed the dismissal of all claims, reinstating the case in its entirety and remanding it Jan. 14, 2010, to the district court. The plaintiffs amended the lawsuit on July 21, 2010, naming more Wal-Mart executives plus Merrill Lynch Pierce, Fenner & Smith, Inc., Merrill Lynch & Co. Inc. and Merrill Lynch Trust Co. of America as defendants. The Wal-Mart defendants include members of the retirement plan committee and the company's compensation committee.

Commenting on the settlement, Wal-Mart spokesman Greg Rossiter said: “We agree it is in the best interest of the parties and plan participants to resolve the claims in this case on the terms laid out in the settlement agreement.”

Merrill Lynch continues as trustee and record keeper, Mr. Rossiter said.

He declined to comment further about the case or expectations for potential searches by the plan for managers of index funds or other funds, an independent fiduciary or other vendors to carry out the settlement.

Matthew Card, Bank of America spokesman, wrote in an e-mail: “We are pleased to have been able to work with Wal-Mart to resolve this matter and continue to serve its employees with a high-quality 401(k) platform.”

According to the plan's Form 5500 for the year ended Jan. 31, the plan offered 17 investment options, including the two index funds. Wal-Mart stock, which had $3.4 billion, was the largest option in terms of assets.

Robert Steyer contributed to the story.