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Week In Review

Circuit Court Permits 401(k) Lawsuit Against Wal-Mart to Be Heard

The Eighth Circuit Court of Appeals has reversed the dismissal of Jeremy Braden v. Wal-Mart Stores by the District Court for the Western District of Missouri. The suit alleges that Wal-Mart's pension and 401(k) administrator breached its fiduciary duty by offering retail funds rather than lower-cost institutional funds, which the company could have negotiated, being of such a large size. As a result, the suit alleges, investors lost tens of millions of dollars in retirement savings.

The suit also says that seven of the 10 funds in the plan also charge 12b-1 fees, to the detriment of plan participants, and that the funds offered revenue-sharing incentives to be included in the plan.

The case is significant because it serves more than one million participants, with nearly $10 billion in investments. The district court had ruled in favor of Wal-Mart, which asked that the case be dismissed. But the Eighth Circuit court reversed that decision, stating that Braden had made a sufficient claim proving a cause of action under ERISA, sufficient proof of personal injury and sufficient time invested in the plan.

The Eighth Circuit court said Braden raised a plausible claim that Wal-Mart's method of selecting funds for its 401(k) plan was "tainted by failure of effort, competence or loyalty."

Judge Orders Reserve to Repay Remaining $3.5B

U.S. District Court Judge Paul Gardephe ordered Reserve Funds to repay the remaining $3.5 billion remaining in the Primary Fund, minus the $83.5 million the company is setting aside for legal expenses, to investors. The money will be paid on a pro rata basis.

On Sept. 16, 2008 the $64 billion money market fund was exposed to $785 million in losses due to its holdings in Lehman Brothers debt, rendered worthless upon its bankruptcy the day before. While the value of the fund's assets fell to 97 cents on the dollar as a result, investors are now expected to get back 99 cents, according to calculations by the Securities and Exchange Commission, which provided the distribution plan to the court.

The judge also decided that the investors who received the full amount of their shares just ahead of the announcement of the Lehman bankruptcy at 8 a.m. Sept. 15, 2008 would not be obliged to pay back any money under a "claw back" clause.

Separately, Reserve announced that it is making its third distribution, of $200 million, to shareholders of the Reserve International Liquidity Fund. This distribution represents 39% of the remaining $507 million total assets in the fund as of Nov. 19. With the additional $200 million payout, Reserve will have returned $2.5 billion, or 86%, of the fund's assets as of the close of business on Sept. 15, 2008.

SEC Prevails in Insider Trading Case Against Former Fidelity Executive

A Boston federal jury ruled in favor of the Securities and Exchange Commission in a case against a former Fidelity Investments trader accused of sharing inside information on Covad Communications with his mother, tipping her off when the fund giant was about to make a large purchase of the stock.

The SEC alleged that between July and September 2003, David Donovan obtained confidential information from Fidelity's internal database on the stock and prompted his mother to buy shares. Donovan must repay $398,000 in ill-gotten gains, interest and penalty. The jury did not find co-defendant, David Hinkle, guilty, nor did it find Donovan guilty of passing insider information to Hinkle. Donovan's mother was not named in the suit.

"This verdict is a victory for investors, and it demonstrates that we will continue to hold Wall Street insiders accountable for insider trading," said SEC Boston Regional Director David Bergers.

Fidelity Drastically Cuts Fees on All 529 Plans

To help parents meet rising college costs, Fidelity has reduced fees on all of its managed 529 college savings plans by one-third to one-half, be the plan direct-or adviser-sold. Additionally, Fidelity has announced investment product and design changes, including increased international equity allocations and the addition of new investment strategies to each plan's age-based portfolios.

As a result of the fee cuts, the index fund fees that Fidelity sells in its direct-sold 529 plans based in New Hampshire, California, Massachusetts, Delaware and Arizona now range from 25 to 35 basis points. Actively managed fees now range from 59 basis points to 1.04%. For adviser-sold plans, fees now range from 84 basis points to 1.48%.

"In these challenging times, we understand that families need all the help they can get and are looking for greater value for their investments," said Joe Ciccariello, vice president of college planning for Fidelity Personal and Workplace Investing. "In addition to Fidelity's investment management expertise, customer-focused service, guidance and education, these fee cuts mean families with Fidelity-managed 529 accounts will now have their money working harder for them."

In addition, Fidelity will be adding new funds to its current line-up of eight age-based portfolios as well as funds covering emerging markets and high yield.