Were Walmart employees charged too much in fees for their 401(k) plans?
The company has settled a $13.5 million class action lawsuit with employee Jeremy Braden and others. The suit claimed that the retailer, along with Bank of America's Merrill Lynch unit, passed along "unreasonably high fees and expenses" to Walmart's 2 million workers.
See also: Tips to reduce your 401(k) fees.
The settlement is a legal landmark because Walmart provides one of the largest 401(k) plans in the world and is the nation's largest private employer, with more than $400 billion in annual sales.
The suit has come to a close at a time when the U.S. Department of Labor is refining a rule concerning "fiduciary duty" — a requirement to look out for a client's best interests — and fee disclosure in 401(k)s.
The government is pressing for full disclosure of all fees paid to middlemen such as savings plan managers and wants stricter legal guidelines on how to provide the most prudent offerings at the lowest possible cost.
"I believe my account has experienced a loss in value, due to the reduced return on my investment in those plan investment options caused by the unreasonably high fees and expenses in those funds," Braden stated in the suit.
Settlement reduced fees, awarded $20,000
So were the fees too high? There's no formal answer to that question in the settlement. Neither company admitted wrongdoing.
Under the terms of the settlement, Jeremy Braden, the original litigant, will collect $20,000. Other employees covered by the class action suit will not receive payouts, but will benefit in the form of up to $9 million in reduced fees going forward. Lawyers for the plaintiffs will collect as much as $4 million.
Retirement plan fees have long been virtually unregulated by the Department of Labor and the Securities and Exchange Commission. Middlemen often pass along high expenses to participants, which means employees' nest eggs are diminished.
Alleged fee gouging has been the subject of numerous worker lawsuits in recent years. The Walmart case is the highest-profile suit to date.
Yet public awareness of the issue remains low. An AARP survey earlier this year found that about seven in 10 401(k) participants didn't even know they were paying fees.
Check your own 401(k) plan
You can get an idea of where your plan stands by using the AARP 401(k) fee calculator.
To fight high fees, here are some questions to ask:
- Has your employer compared costs between your plan and those of similar asset size? The 401(k) research firm Brightscope rated Walmart's plan 50 on a scale of 100. Compared to participants in the best-rated plan in its category, Brightscope estimated, Walmart employees were losing about $220,000 over the course of a career.
- Does your plan contain actively managed, broker-sold or insurance-company mutual funds? If so, you're likely paying high fees.
If you're in a large program, you should be getting "institutional" rates, not retail rates. Instead of paying 1 percent annually for fund management, for example, you could be paying as little as 0.07 percent annually for a stock-index fund.
- Has your employer replaced actively managed funds with lower-cost index mutual or exchange-traded funds? The lower the fees, the higher your potential return.
- Has your employer hired an independent fiduciary consultant to shop for the lowest-cost provider? This specialist will have no personal financial interest in the plan itself and will be legally obligated to find the most prudent arrangement.
The Department of Labor is expected to announce new guidelines on plan expense disclosure early next year. In the interim, find out how much middlemen are charging you and consider demanding a better deal.
You may also like: Calculate whether your retirement is on track. >>
John F. Wasik is a personal finance columnist for Reuters and the author of The Cul-de-Sac Syndrome and 12 other books.