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

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.

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.