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A Closer Look at the Braden v. Wal-Mart Case

A poster child for the way in which a 401(k) plan should not be run.

W. Scott Simon, 02/02/2012

I participated on a panel at an investment gathering a couple of weeks ago. Toward the end of my comments, I briefly discussed the settlement proposed by plaintiffs in the Braden v. Wal-Mart Stores, Inc. case. To my surprise, the audience was absolutely riveted by what I was saying. I'd like to chalk up that reaction to my stellar good looks and overall peachy disposition, but alas, neither would be true. Even more remarkable, this occurred late in the day when I was about the last remaining obstacle between the audience and Happy Hour. All that made me think that a column on the Wal-Mart case would be interesting to advisors.

The Wal-Mart case is the poster child for the way in which a 401(k) plan should not be run: plan investment options bearing excessive and entirely unnecessary costs, undisclosed conflicts of interest, lack of meaningful disclosure of costs to plan participants (which was actually part of the agreement between plan fiduciaries), and, I'd argue, an apparent absence of any serious fiduciary mindset on the part of the plan sponsor fiduciary and the trustee fiduciary.

A Bit of History
Jeremy Braden, a Wal-Mart employee from Ozark, Mo., filed a class action lawsuit in U.S. District Court in Springfield, Mo., against Wal-Mart in March 2008. He alleged that Wal-Mart breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA). Braden had two basic contentions. First, the 10 mutual fund investment options offered by the Wal-Mart 401(k) plan--eight of which were actively managed--were not only priced at retail but highly priced at retail to boot, so they were imprudent per se given that the Wal-Mart plan held about $11 billion in assets. Second, Braden argued that the process by which these investment options were selected for the plan menu was essentially a corrupt one because every fund generated revenue-sharing payments to Merrill Lynch in its capacity as the (fiduciary directed) trustee and (non-fiduciary) record-keeper of the Wal-Mart 401(k) plan.

The district court judge tossed Braden's lawsuit in late 2008, but his decision was unanimously overturned in November 2009 by a three-judge panel of the U.S. Eighth Circuit Court of Appeals. The case was then returned to the district court for further action. The parties then eventually agreed to settle the case with the district court judge providing preliminary approval of the settlement last month and final approval set for March. Wal-Mart has agreed to pay $13.5 million with the net amount (after attorneys' fees, costs and administrative expenses) going to pay for plan expenses.

The Menu of Investment Options for the Wal-Mart 401(k) Plan
What follows is a table detailing the menu of 10 mutual fund investment options offered to participants by the Wal-Mart 401(k) plan in 2008, the year that Braden filed his class action lawsuit. (The plan apparently offered other investment options in addition to the mutual funds in the table. These included (1) a common/collective trust, (2) a stable value fund (comprised of a money market fund, a common/collective trust, and traditional and synthetic guaranteed investment contracts) and (3) Wal-Mart common stock).

While Braden's pleadings focused on the high retail-priced annual expense ratios of the mutual funds, there seems to have been no mention of the annual turnover rate or any commissions for the funds. Yet the harmful monetary impact of either or both of these factors--which are represented in the following table--on the wallets of plan participants can, in some cases, could be a multiple of the impact made by expense ratios alone.

The costs in the preceding table are expressed in basis points (bps). One basis point is equal to 1/100th of one percentage point (0.01%). 100 basis points therefore equal one percentage point (1.00%).

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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