Wal-Mart Sued For Not Buying Vanguard

May 07, 2008

Sometimes, it takes a handful of lawyers to make things right.

Anybody else see this fun little story in Pensions & Investments about Wal-Mart? It's being sued for having a 401(k) plan that's too expensive. Specifically, the suit claims that Wal-Mart stiffed employees two ways:

  1. By investing in high-cost retail funds (being the largest employer in the world, it probably qualified for institutional share classes).
  2. By not buying Vanguard funds.

The suit is not quite as blunt about the Vanguard thing, but it does make a direct comparison to the Pennsylvania indexing giant:

"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-year period," writes Mark Bruno in P&I.

Instead, the plan put money into funds like the AIM International Growth Fund, which charged plan participants 1.59% ... overpaying by more than 1% compared with the Vanguard International Growth Fund (expense ratio 0.55%).

Tsk, tsk.

I'm not a big fan of lawsuits, for various reasons, but if that's what it takes to get low-cost funds into every 401(k) program, I'm all for it.

Let's not forget: Fees matter a lot in 401(k) programs, because of the long holding times. According to the Labor Department (via USA Today), $25,000 invested for 35 years at a 7% return adds up to $227,000. If the fee is 1.5%, you're down to $163,000.

The 401(k) industry has been a handout to the fund industry for a long, long time. Something's gotta change.

(While we're at it, can we establish 1% as the cutoff line for equity fund expense ratios? Any equity mutual fund that charges more than 1% of your money better be very, very special indeed.)


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