It’s Not Just the Size Of the Fees In Your 401(k) Plan, But the Funds It Uses

Add Wal-Mart to the list of companies being sued by employees for breach of fiduciary duties of their company 401(k) plan.

One of the interesting things about the Wal-Mart suit is that employees are not just suing over the alleged unreasonable fees charged by the plan. The suit also claims that participants’ returns were adversely affected because most of the funds offered in Wal-Mart’s 401(k) plan were actively managed funds. An article from Pensions and Investments describes why employees added this to their suit (emphasis ours):

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.

We’ve been beating this drum for a long time now. It’s not just the fees that can eat into your 401(k) returns but active management risk (aka the fallacy that fund managers can consistently outperform the market). A 401(k) plan that only uses actively managed funds is doing a huge disservice to plan participants who will often do much better sticking with index funds.

It looks like more 401(k) plan participants (and lawyers) are starting to take notice.

You can see the full version of the P&I article here.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
•