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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 28, 2008 12:01 AM ET
If any executives at large corporations think lawsuits over 401(k) fees are going somehow to quietly disappear anytime soon, 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 of these corporations have been bigger than the latest target: Wal-Mart, 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, Deere and General Dynamics, the suit against Wal-Mart—filed last month and currently seeking class-action status—claims that the company breached its duties as a fiduciary by allowing its 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,” the claim stated, “particularly for a massive plan like Wal-Mart’s with tremendous potential to leverage economies of scale.” Wal-Mart spokeswoman Daphne Moore said the company is aware of the claim and is reviewing it, but she declined to comment further. Wal-Mart is not alone in offering 401(k) participants retail mutual funds. In fact, 50% 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% 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, Mo., and Keller Rohrback of Seattle), carry expense ratios ranging from 0.30% to 1.59% of assets. “As a group, many of the largest companies actually have very good plans with very low fees,” said Judy Schub, managing director of public policy at the Association for Financial Professionals. (Ms. 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 appears to be seeking 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, as 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 goes on to allege that the basic fees weren’t the only factor that adversely impacted 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% of assets—with Vanguard’s International Growth Fund. This fund, also an actively managed retail fund, has a fee of 0.55% of assets. The difference for Wal-Mart plan participants: They’d 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 Jan. 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, said 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,” 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.” FW
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