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Even Wal-Mart Can Make 401(k) Blunders

Pity Wal-Mart's (NYSE: WMT  ) lawyers. The company seems to get socked with lawsuits frequently. Recent litigation against the company revolves around a critical topic: retirement savings. The allegation this time is that the mutual funds it offers its employees in its $9.5 billion 401(k) plan are suboptimal, charging needlessly high fees. This is due primarily to two factors: offering many actively managed funds rather than lower-cost index funds, and offering many "retail" funds instead of "institutional" ones.

On the first count, it's very true that index funds tend to be much cheaper than managed funds. (An index fund is "passively" managed, with managers needing to make few decisions other than replicating the line-up of a certain stock index. In managed stock funds, managers study companies and decide what to buy and sell and when.) Whereas a typical managed stock fund will charge 1% or more per year (and sometimes more than 2%), some index funds charge less than 0.1%. Index funds in general outperform managed funds, too, partly because of the fee disparity. The Wal-Mart plan reportedly sports funds with expense ratios (annual fees) ranging from 0.3% to 1.59%.

Even among managed funds, fees vary widely. The lawsuit cites one Wal-Mart offering, the AIM International Growth Fund (AIIEX), which charges more than 1.4% per year. A cheaper alternative might be the Vanguard International Growth Fund (VWIGX), with an expense ratio of 0.51% and a five-year record of 20.1%. They share many holdings, such as Teva Pharmaceuticals (Nasdaq: TEVA  ) and Total SA (NYSE: TOT  ) . Per the suit, Wal-Mart investors would have paid $2.8 million less in fees with the Vanguard fund over six years.

Note, however, that sometimes higher-fee funds are able to make up the difference in their returns. For instance, both the AIM and Vanguard funds above had five-year average gains of 20.1%.

On the retail versus institutional front, know that retail investors are individuals like you and me, whereas institutional investors are ... well, you know: big entities, like pension funds. The thinking here is that Wal-Mart has more than enough money invested to qualify for institutional funds and their lower fees.

Wal-Mart isn't alone in receiving 401(k) criticism. Boeing (NYSE: BA  ) , Deere (NYSE: DE  ) , and General Dynamics (NYSE: GD  ) are among the many companies that have also had the pleasure of getting sued.

Study your 401(k) options carefully, and test drive, for free, our Rule Your Retirement newsletter for lots more guidance.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart. Total SA is a Motley Fool Income Investor pick. Wal-Mart is a Motley Fool Inside Value recommendation. Try our investing services free for 30 days. The Motley Fool is Fools writing for Fools.

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  • Report this Comment On June 01, 2008, at 5:57 PM, madmilker wrote:

    Maybe it has to do with dropping the hyphen from the name and replacing it with that big single star......duh!

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