Former and current employees of Wal-Mart (WMT) last month filed a lawsuit (currently seeking class-action status) seeking $60 million in damages from the world’s largest retailer alleging excessive fees in the company’s retirement plan. As the country’s largest employer with nearly 1.4 million employees and $9.5 billion in 401k assets, the suit alleges Wal-Mart could easily afford to take advantage of economies of scale in its plan and offer lower-cost institutional funds as plan options rather than more expensive retail versions of those funds. This, claims the suit, amounts to a breach of the company’s fiduciary duty to provide adequate investment options and run its 401k plan in the best interests of its investors.
Wal-Mart’s 401K Plan Is Lacking
I certainly agree that Wal-Mart’s 401K plan is sub-par but disagree with the validity of the lawsuit’s claims that it constitutes a breach of fiduciary duty. One example cited by the suit is the 1.59% expense ratio of the AIM International Growth Fund (AIIEX) offered by the plan. While I would certainly never pay that much for a mutual fund, that doesn’t make it an irresponsible fund choice. While 1.59% is an above average expense ratio for an international mutual fund according to Morningstar, it performed in line with the average international growth fund. Yes, the Vanguard International Growth Fund (VWIGX) is cheaper and out-performed the AIM option offered in the plan, but there was no way to know that before-hand. A 3% expense ratio would be irresponsible but 1.59%? That’s not especially egregious.
The suit also alleges there aren’t enough low-cost index fund options in the plan. No arguments here, I love index funds and choose them whenever possible, but the fact is, the vast majority of investors don’t buy index funds if given the choice. Novice investors tend not to like them because they don’t offer the opportunity to beat the market. Sure, the vast majority of actively-managed mutual funds will fail to beat the market and sure the plan participants would likely be better off if only index funds were offered, but is it really Wal-Mart’s responsibility to save investors in spite of themselves? It’s difficult to argue Wal-Mart isn’t giving its participants what they want: actively-managed mutual funds with a chance to beat the market. If investors as a whole eschew index funds in favor of more active investment strategies, I don’t see how you can claim giving investors what they want is immoral or a breach of fiduciary duty. In the end, investors make and are responsible for their own investment decisions.
Besides, I have a better solution to the problem of crappy 401k plans: take companies out of the loop entirely. There is no logical reason why retirement accounts should be linked to employers at all. Allowing employees to open a portable 401k account at the brokerage of their choice would solve a host of problems, which I’ll discuss next week. Stay tuned.
2 responses so far ↓
1 Four Pillars // May 15, 2008 at 4:33 am
Hopefully the action will make Walmart offer some low cost choices - maybe that’s the real purpose of the suit?
That’s an interesting point about 401k plans. In Canada we have rrsp plans which are essentially the same thing but they are not tied to an employer (but they can be). A much superior system.
2 Dear Washington: My Retirement Plan Wish List | Amateur Asset Allocator // May 21, 2008 at 7:41 am
[...] For the life of me, I can’t figure out why my employer should be in charge of my retirement account. It’s my money, after all. Why can’t I invest it where I want? Oh sure, they may make matching contributions every once in a while, but does that give them the right to tell me which fat-cat mutual fund manager’s yacht I should pay the mortgage on? Why don’t I just let them choose my wife while they’re at it? This whole dating thing is a scam anyway. I would probably be much better off letting my employer control my personal finances anyway because I’m certain they have my best interests in mind. Just ask the guys at Wal-Mart. [...]
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