Saturday, February 13, 2010

Is a 401K Really Good For You or Just Kickbacks For and Robbery For Somebody Else???

In a recent Forbes magazine (Jan. 18 print edition) there is an excellent story about the backdoor deals that go on very commonly with employers' 401K plans and how they choose inferior mutual funds for you, and that they are also a very limited choice of inferior mutual funds.

The writer, Stephane Fitch (who did a superb job of journalism here) uses the example of Wal-Mart, which has 1.2 million participants in its 401K plan, which makes it the most populous 401K plan in the world.  Wal-Mart which is known for its low prices offered to shoppers in stores, apparently wasn't so nice to its own employees when offering them high priced retail mutual funds in their 401K plan, and also limited choices of those high priced mutual funds with only ten funds to choose from.

Fitch says, and I quote her story directly here:
"It was as if the greatest retailer in history had consigned its employees to shop for retirement services in a Soviet department store."
The story goes on to say that Wal-Mart is anything but uncommon among employers in this aspect.  Disgracefully, tens of millions of workers have 401K plans infested with poor fund selections, almost zero cost disclosure and fees that do not take advantage of employers' bulk buying power.

All through its 10 year long existence, Wal-Mart's $10billion (of assets) 401K plan has been run by Merrill Lynch which is more infamous for its large group of full-service (and full-charging) securities salesmen than for low commissions.  On the other hand of the spectrum you have Wal-Mart which is known to be extraordinarily fierce with suppliers of its goods, and its leaders certainly know how to get bargains.  The executives of Wal-Mart definitely managed their own retirement plans quite well with large guaranteed returns.

Well, "lo and behold!!!", one employee at Wal-Mart dared to say enough was enough.  Jeremy Braden in Ozark Missouri filed a class action law suit and alleges that when failing to demand institutional rates for employees' 401K plans and failing to disclose details of revenue sharing plans between Merrill Lynch and eight outside firms with funds on Wal-Mart's 401k plan menu, Wal-Mart had breached its fiduciary duty under the Employee Retirement Income Security Act (ERISA).  That breach cost Braden and all Wal-Mart employees in Wal-Mart's 401k plan $140million in excess fees in the six years through 2007, the suit claims.  And here again I quote directly from Stephane Fitch's article:
"Merrill Lynch, with Wal-Mart's blessing, was choosing mutual funds based on payments that the funds would make to Merrill Lynch," says Braden attorney Derek Loeser of Keller Rohrback in Seattle, Wash. "This explains the anomaly of a $10 billion plan ending up with off-the-shelf retail funds that just so happen to share revenue."
Yes, those last words are the most crucial "just so happen to share revenue", shocker eh?? Fitch's article also notes and I quote from it directly here:
"Because the case involves the giant retailer and controversial practices common across defined contribution retirement plans, a ruling that requires Wal-Mart and Merrill to reveal more about the motives that went into assembling the fund menu, and how it was priced, could prove a watershed for the $2.3 trillion (assets) 401(k) business."
Wal-Mart incidentally has no guaranteed match for contributions to 401K plans.

At question at the core of Braden's suit is:  Do employees have the right to know, that the retail mutual funds they are constrained to choose from in the plan (only 10 in this case), seem to be chosen by Merrill Lynch on the basis of kickbacks given behind closed doors, and not chosen on the basis of quality, safety, and potential returns for employees when they retire???

Wal-Mart has never explained how the funds were chosen.  In fact, Wal-Mart signed a nondisclosure  agreement with Merrill Lynch, which legally prevents them from saying anything.  And surprise surprise, Merrill Lynch declines comment....

Braden's lawyers strongly suspect the fees that the mutual funds charge to Wal-Mart employees are then "rebated" back to Merrill Lynch.  His lawyers also suspect that not only were asset management fees "rebated" but also flat fees were "rebated" to Merrill Lynch, which would create a conflict of interest when Merrill's people gave advise to the Wal-Mart workers.

For each fund the participant chooses to put in his individual 401k plan there is a $8 to $12 flat fee added.  Take that flat fee and multiply it by the number of employees (in Wal-Mart's case 1.2 million) and you could see why Merrill might advise Wal-Mart employees to choose more funds from the limited choice of 10.  But that is most likely happening in many 401K plans, not just Wal-Mart's.  In other words, this alleged crime on employees, bilking employees with fees which kickback to the company managing the plan, is happening in many companies now, not just Wal-Mart.  Reader take note.

Next time you're called in to discuss retirement plans by your boss, you might ask, with your fellow employees listening, "How are the mutual funds on my 401K menu chosen???" and if they say by a 20 man committee of "experts", just know in your mind what is really happening.  Again, please read the Forbes article,  if you have a 401K it is worth your time to read.


  1. Good piece. I wrote on this a while ago:

    It's not a new problem. Companies force the employees to eat all of the expenses, and don't search for the best deal. And, yes, there are non-obvious kickbacks.

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