Franklin Resources Inc., the asset management firm operating under the name Franklin Templeton Investments, has been sued for self-dealing in its own 401(k), joining a growing list of similarly situated companies targeted by their employees for excessive retirement plan fees.
In the class-action suit, Cryer v. Franklin Resources, Inc. et al, plaintiffs allege the firm and certain individuals overseeing the 401(k) plan breached their duties under the Employee Retirement Income Security Act of 1974 for selecting high-cost, poor-performing proprietary funds for the plan in place of better, lower-cost alternatives.
Plaintiffs also claim a breach due to excessive fees for administrative services and using a money market fund in place of a stable value fund.
“Despite the many investment options available in the market, the Plan has invested hundreds of millions of dollars in mutual funds managed by Franklin Templeton and its subsidiaries. These investment options were chosen because they were managed by, paid fees to, and generated profits for Franklin Templeton and its subsidiaries,” according to the complaint, filed July 28 in the U.S. District Court for the Northern District of California.
Franklin spokeswoman Stacey Coleman said the firm is still reviewing the complaint and doesn't have a comment at this time.
All 40 mutual funds in the $1.2 billion Franklin Templeton 401(k) Retirement Plan are managed by Franklin Templeton and its subsidiaries, the complaint said. Prior to 2015, a State Street Global Advisors-managed S&P 500 collective investment trust fund was the only passively managed, non-proprietary option in the plan, according to the complaint.
Plaintiffs claim that while the proprietary funds generated millions of dollars in fees for Franklin Templeton, the plan lost $64 million since 2010 when compared with “prudent alternatives such as comparable Vanguard Funds” due to unreasonable fees “significantly higher than the median.”
Plaintiffs also allege fiduciaries allowed an excessive total plan cost, inclusive of administration and investment management expenses. At 57 basis points, the plan overpaid approximately $15 million than it should have for a $1 billion-plus 401(k) plan.
Further, selecting a money market fund over a stable value fund — two types of capital-preservation investment options — caused the plan to lose more than $9 million over the six-year period since 2010, due to low investment returns, plaintiffs claim. This has been a common theme among other excessive-fee 401(k) suits.
The suit follows closely on the heels of other suits alleging self-dealing on the part of other asset management firms in their own 401(k) plans.
“This is the latest in a wave of plaintiff class-actions against firms with proprietary mutual funds being placed in their own plans,” said Duane Thompson, senior policy analyst for fi360 Inc., a fiduciary consulting firm.
Massachusetts Mutual Life Insurance Co. and Transamerica Corp. settled separate suits in June for multimillion-dollar payouts. Fidelity Investments and Ameriprise Financial Inc. settled as well within the past few years.
“I think it will take a number of years before we see the fallout from all of these,” Mr. Thompson said, adding the lawsuits will likely prompt financial services companies to evaluate the proprietary funds more carefully before putting them in their own 401(k) plans.