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
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
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