8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion

November 27, 2009 (PLANSPONSOR.com) – The 8th U.S. Circuit Court of Appeals has vacated a district court's dismissal of a suit alleging Wal-Mart Stores, Inc. breached its fiduciary duties to 401(k) participants by selecting investment options that charged excessive fees.

In its opinion the appellate court said the district court erred in concluding that Jeremy Braden lacked standing to maintain claims for the period before he began participating in the plan (see Wal-Mart Captures Resounding Excessive Fee Suit Victory). The court found Braden satisfied the requirements for constitutional standing because he alleged actual injury to his own plan account, and that injury is fairly traceable to the defendants' conduct because Braden alleged a causal connection between their actions - even those taken before his participation in the plan - and his injury.

In addition, the court determined the injury is likely to be redressed by a favorable judgment.

The appellate panel also concluded that the district court erred in finding the complaint inadequate because it did not allege sufficient facts to show how Wal-Mart's decision making process was flawed. "Accepting Braden's well pleaded factual allegations as true, he has stated a claim for breach of fiduciary duty," the court said.

Braden alleged that Wal-Mart and other employees involved in administering the plan failed adequately to evaluate the investment options included in the plan, and that the process by which the mutual funds were selected was tainted by their failure to consider trustee Merrill Lynch's interest in including funds that shared fees with Merrill Lynch.

While the appellate court said the district court correctly noted that none of Braden's allegations directly addresses the process by which the plan was managed, it said it is reasonable, however, to infer from what is alleged that the process was flawed.

Braden's allegations included that:  

• The plan comprises a very large pool of assets, that the 401(k) marketplace is highly competitive, and that retirement plans of such size consequently have the ability to obtain institutional class shares of mutual funds, but despite this ability, each of the ten funds included in the plan offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investment.
• Seven of the plan's ten funds charge 12b-1 fees from which participants derive no benefit.
• Defendants did not change the options included in the plan despite the fact that most of them underperformed the market indexes they were designed to track.
• The funds included in the plan made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the plan.

"If these allegations are substantiated, the process by which appellees selected and managed the funds in the Plan would have been tainted by failure of effort, competence, or loyalty. Thus the allegations state a claim for breach of fiduciary duty," the opinion stated.