Compliance December 6, 2011

Wal-Mart and Merrill Lynch to Pay $13.5M for Excessive Fee Suit

Wal-Mart Stores and Merrill Lynch have agreed to pay $13.5 million to settle a class-action lawsuit.
Reported by

Wal-Mart and Merrill Lynch, its retirement plan administrator, allegedly breached their fiduciary duty for nearly two million past and present Wal-Mart employees in the company’s 401(k) plan, according to news reports.

According to papers filed in a Kansas City federal court, the two defendants admitted no wrongdoing. However, Wal-Mart said it would “further its goal to offer investment options with fees that are reasonable,” remove mutual funds that charge high fees and provide more financial education to its employees.

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Matthew Card, a spokesperson for Bank of America, said to PLANADVISER: “We are pleased to have been able to work with Wal-Mart to resolve this matter and continue to serve its employees with a high-quality 401(k) platform.”  

Wal-Mart employees will not directly receive the $13.5 million from the settlement. The settlement will go toward reducing future 401(k) plan fees. However, named plaintiff Jeremy Braden will receive $20,000 from the settlement funds. Lawyers representing the class could receive as much as $4 million of the settlement. A court hearing that will approve the settlement and the fees will be held at a future date.

The lawsuit was originally filed in 2008 by Braden, a Wal-Mart employee in Highlandville, Missouri. The lawsuit charged that Wal-Mart did not do enough to get lower fees for its mutual fund offereings. The lawsuit alleged various violations of fiduciary duty and federal pension law (see "Wal-Mart Hit with Excessive 401(k) Fee Suit"). 

The trial judge’s dismissal of the case was reversed by the federal court of appeals in St. Louis, Missouri. In an amended complaint, Braden added Merrill Lynch to the suit as a defendant, alleging the investment firm received undisclosed kickback payments from outside mutual fund companies just for allowing them to be in the plan, reports Forbes (see "Wal-Mart Captures Resounding Excessive Fee Suit Victory" and "Court Says Wal-Mart 401(k) Suit Requires Further Discussion").  

The Markets December 5, 2011

Callan DC Index Suffers Loss in Third Quarter

 The Callan DC Index suffered a loss of 11.45% in the third quarter of 2011.   
Reported by

Even with the average defined benefit (DB) plan setting the bar low, with a -7.08% quarterly return, the DC Index still trailed by nearly 4.5 percentage points. This widened the performance spread between the DC Index and the average DB plan to 2.3 percentage points since the inception of the DC Index in 2006.

Even given this poor performance, the DC Index still bested the average 2030 target-date fund during the third quarter. This continues a longer-term trend whereby the average comparable target date fund has tended to underperform the DC Index during market downturns and outperformed in market rallies.

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This is largely attributable to target-date funds having considerably more in equities than the average DC participant’s portfolio. The average 2030 fund currently has 78% in equities, compared to 61% in the DC Index. Participants’ lower equity allocations may reflect both greater risk aversion and failure to rebalance during down markets. The net result of this phenomenon during the very volatile, nearly six-year duration of the DC Index is that target date funds have underperformed by an average 60 basis points annually (0.75% versus 1.35%).

Since inception, total annualized growth of participant balances stands at 4.47%, with about 70% due to plan sponsor and participant contributions. Returns have only contributed 1.35% of the total. Given market weakness, programs that help participants increase deferral levels (e.g., automatic contribution escalation) are more important than ever. 

Despite the market turmoil, participant reaction was muted in the third quarter. Overall, DC Index turnover was in line with the historical average at 0.71%. When money moved, it generally fled into capital preservation vehicles, with money market and stable value funds accounting for nearly half of all inflows. Domestic equity funds (large and small/mid cap) lost the most assets during the third quarter, comprising two-thirds of outflows during that period. While target-date funds continued to see net inflows during the quarter, balanced funds experienced net outflows. Target-date funds remain the only asset class in the DC Index that have avoided net outflows on a quarterly basis—undoubtedly due in large part to the inertia of people automatically enrolled in such funds.

With assets flowing to fixed income during the quarter and equity markets declining, the overall share of equities in the DC Index fell to 61%, a low not seen since mid-2009. Large cap equity funds continued to house the majority of assets; however, with frequent, significant outflows over time, large cap funds’ share of assets within the DC Index has fallen from 32% to 23% since inception.

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