Trader Joe’s 401(k) Plan Accused of Overinvesting in Balanced Fund

The $2.7 billion dollar plan also joins the more than 30 employers accused of mismanaging employee forfeiture funds.

Six former employees of the Trader Joe’s Co. filed a lawsuit against the grocery chain last week, as well as its board of directors and investment committee, claiming the 401(k) plan was overinvested in one fund with excessive fees and that the company mismanaged forfeited funds.

Stephen et al. v. Trader Joe’s Co. et al. was filed in U.S. District Court for the District of Massachusetts on January 28. According to the complaint, approximately 70% of plan assets—nearly $2 billion—were invested in one fund in the 401(k) plan—the American Funds American Balanced Fund R4—in 2019 and 2020.

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Starting in 2021, the assets held in the fund were transferred to the Capital Group American Balanced Trust, a collective investment trust. While this version of the fund was available “at all times relevant,” fiduciaries at Trader Joe’s maintained the same R4 share class in the 401(k) until 2021, according to the lawsuit.

“To the financial detriment of plaintiffs and the participants, the R4 share class of the American Balanced Fund saddled the participants with needlessly high fees,” the complaint states. “The facts show that defendants wholly failed to fulfill their fiduciary obligations in regard to monitoring plan investments and ensuring all fees paid by the plan and participants were reasonable and necessary.”

The plaintiffs—represented by law firms Jeffrey Hellman, Capozzi Adler and Muhic Law LLC—allege that the CIT version of the fund has lower fees and that fiduciaries should have replaced the R4 share class with the CIT. The former employees also argue that the failure of Trader Joe’s “to include a target date suite in the plan” was imprudent.

Capital Group, the plan’s recordkeeper, charged fee of $48 per participant for its recordkeeping services, which the lawsuit alleged is “grossly excessive” compared with what the fiduciaries could have negotiated, based on the size of the plan.

The Trader Joe’s Co. Retirement Plan had more than $2.7 billion in assets under management and 44,218 participants with account balances at the end of the plan’s year in 2023, according to its Form 5500 filing.

In addition, the company was accused of using millions of dollars in plan assets, obtained from participant forfeited funds, for its own benefit by using funds to reduce future company contributions.

Trader Joe’s did not immediately respond to a request for comment on the lawsuit.

More than 30 other employers have been sued over the last year for using forfeiture funds toward reducing future employer contributions, even though, according to the IRS, 401(k) plan forfeitures can be used for any of three permitted purposes: to pay plan expenses, to reduce future employer contributions or to make an additional allocation to participants.

Vanguard Announces Largest Fee Cut in Firm’s History

Of the funds with reduced fees, 48 include institutional or institutional plus share classes.

The Vanguard Group Inc. announced Monday fee reductions on 168 share classes across 87 investment funds in what the firm called its largest fee cut to date. The firm projects that the fee reductions are expected to save investors of all kinds more than $350 million this year alone.

Of the funds with reduced fees, 48 include institutional or institutional plus share classes. The fee reductions for these share classes ranged anywhere from one to five basis points. Target-date funds for retirement plan participants were not included in the fee reductions.

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Vanguard offered 428 funds worldwide—212 in the U.S.—as of the end of 2023, according to its website.

“Lower fees mean fund investors can keep more of their returns and a competitive edge for our funds,” said Greg Davis, Vanguard’s president and chief investment officer, in a press release. “When you think about our actively managed funds, our managers don’t have to take unnecessary risk to earn back our fees. Our financial model and structure [create] a virtuous cycle of economies of scale, where we can continue to reduce fees and invest in things like technology and talent.”

The prospectuses of all affected funds were updated Monday in filings with the Securities and Exchange Commission, according to the announcement.

Expense ratios may cover investment advisory fees, marketing and distribution expenses, brokerage fees and custodial, transfer agency, legal and accounting fees, according to Vanguard. The full list of funds with reduced fees can be found here.

The company has about $10.4 trillion in assets under management as of November 30, 2024. At the end of 2023, it had approximately $8.6 trillion in assets under management worldwide.

The move to lower fees come less than one year after Vanguard announced that Salim Ramji, the former head of BlackRock Inc. iShares, would take over as the firm’s CEO, succeeding Tim Buckley, who retired at the end of 2024.

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