Wal-Mart practically owns the word “discount.” But the behemoth retailer, well known for muscling its suppliers to provide goods at the lowest possible cost, apparently didn’t try so hard to rein in costs in its own 401(k) plan, to the detriment of thousands of current and former employees.
In 2012 Wal-Mart and its brokerage, Merrill Lynch, which was trustee and administrator of its 401(k) plan, agreed to pay a $13.5 million settlement in a class-action suit that accused the retailer of breaching its fiduciary duty by failing to negotiate lower fees for the plan’s mutual funds. As a result, excess fees had cost 401(k) participants about $60 million over six years, the suit charged. Plaintiffs also alleged that Wal-Mart should have told participants how they’d be affected by the high fees. They also alleged that Wal-Mart should have divulged that mutual-fund companies in the plan used part of the fees they earned to reward Merrill Lynch for including them in Wal-Mart’s lineup. That common practice is called revenue-sharing. (The suit called the payments “kickbacks.”) In the settlement, neither Wal-Mart nor Merrill admitted any wrongdoing.
Jerome J. Schlichter, a St. Louis lawyer who has brought more than a dozen class actions against large 401(k) plan providers, says any large plan sponsor that isn’t providing reasonable-cost investment options is shirking its fiduciary duty. “If you have a $1 billion company, you should not be paying retail fees,” he says.
Schlichter is at the forefront of a small but growing movement to force large plan sponsors to address revenue-sharing and other hits on participants’ retirement assets.
Those class actions, combined with more-transparent fee disclosures, have begun to have an impact. Sponsors of 401(k) plans are proactively changing, hiring independent fiduciaries to watch over their plans, and choosing more reasonably priced investments such as index funds, says Ary Rosenbaum, a lawyer who advises on compliance with the Employee Retirement Income Security Act (ERISA), the federal law that governs retirement plans. And because of the litigation and fee-disclosure regulations, more ERISA and Department of Labor officials are paying attention to plan sponsors’ actions, Rosenbaum says.
Smaller employers in the dark
Most large employers can employ consultants, lawyers, and other professionals to correct those shortcomings. But small and medium-sized businesses often don’t have those resources. And the evidence shows that they’re often clueless about fees, to workers’ detriment.
Consider, for instance, investment-management fees, or expense ratios. They are usually the largest mutual-fund expense. In a study last year by the Government Accountability Office, half of small and medium-sized employers surveyed about 401(k) expenses didn’t know whether they or their plan participants paid investment-management fees. (The GAO says participants paid.)
Sponsors of more than half of those small and medium-sized plans told the GAO that they hadn’t asked their plan providers about fees for marketing and distribution (called 12b-1 fees), reimbursements to record keepers for certain expenses (sub-TA fees), extra broker commissions, trading and transaction costs, and “wrap” fees, which are associated with annuities. About half of plan sponsors who provided investment reports to GAO researchers didn’t realize their 401(k)s had revenue-sharing arrangements like those in the Wal-Mart 401(k) plan.
How to take control
You don’t have to resort to litigation to improve your 401(k) plan—and your individual account. To change elements in your 401(k) lineup, follow these steps:
- Find the fiduciary. The plan fiduciary, an individual named in plan documents, is your primary contact for all correspondence. Ask your employee-benefits manager for the correct name. Or search for your company plan online at BrightScope. The fiduciary’s name will be on your plan’s page under the tab for Form 5500 Data. (Form 5500 is a federal disclosure that all retirement plans must file.)
- Collect documents. Find fund expense ratios in the annual disclosure of your funds’ expenses, which your plan must send to you by Aug. 30 (most will arrive by mail). On the report you’ll see an explanation of each fund’s average annual returns over one, five, and 10 years; the comparable returns of a benchmark fund; and average annual operating costs as a percentage of assets and as a dollar figure per $1,000 invested. You also should receive a quarterly fee statement showing additional expenses specific to you, including loan-administration fees.
- Research new funds. “If they don’t have any index funds, that’s your first thing to ask about,” says David Loeper, an investment manager and author of “Stop the Retirement Rip-Off!” (2009, Wiley). Such funds simply mirror the portfolios of broad market indexes such as the Standard & Poor’s 500. Managers don’t need to do a lot of research to pick index portfolios, so costs are low.
- Draw up comparisons. You’ll need to show what makes your choices better than the plan’s current lineup (see “Want Changes in Your 401(k)?” below).
- Write to the fiduciary. Include your research. Mention how the costs affect not only you but also everyone in the company who invests in those plans. “Make it easy for them to see the high fees,” says Stuart Robertson, president of ShareBuilder 401k by Capital One, an investment company that provides 401(k) plans to small and medium-sized businesses.
- Enlist others. Ask co-workers to sign your letter. “If the plan sponsors get one person, it’s one squeaky wheel,” Loeper says. “If they get three, four, five, they start wondering, how many people are worried about this?”