BlackRock sued for alleged self-dealing in its 401(k) plan

The plaintiff takes issue with a so-called "layering scheme" in BlackRock's fund structure, whereby a fund's underlying proprietary investments charge additional fees that "cannibalize" returns for employees.

BlackRock Inc., the world’s largest asset manager, is being sued by a former employee for self-dealing in the company’s 401(k) plan, the latest excessive-fee case involving an asset manager offering proprietary investment funds to retirement plan participants.

In the lawsuit, Baird v. BlackRock Institutional Trust Company, N.A. et al, the plaintiff claims almost all the fund options in the company’s roughly $1.6 billion 401(k) plan are affiliated with BlackRock, even though the funds have high fees and poor performance.

By actively benefiting itself through the selection and retention of these funds, BlackRock breached its fiduciary duties under the Employee Retirement Income Security Act of 1974, plaintiff Charles Baird, a plan participant, claims.

In particular, the plaintiff takes issue with a so-called “layering scheme” in BlackRock’s fund structure, whereby a fund’s underlying proprietary investments charge additional fees that “cannibalize” returns for employees.

“Plan participants were subjected to higher hidden fees through excessive fund layering, where one BlackRock fund invests in a rabbit hole of other BlackRock funds,” according to the lawsuit.

In total, 21 of BlackRock’s proprietary funds “funnel the employees’ retirement assets into other BlackRock funds,” which charge additional fees that aren’t included in the fund expense ratios, the lawsuit claims.

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BlackRock’s LifePath target-date funds, a suite of 10 collective investment trust funds representing approximately 34% of plan assets, garner much of the lawsuit’s attention.

These funds, which invest in 27 underlying BlackRock proprietary funds, caused the plan and participants to suffer losses of $60 million through excessive fees and underperformance from 2011 to the present day, according to the lawsuit, filed April 5 in the U.S. District Court for the Northern District of California.

BlackRock spokesman Farrell Denby said the firm is committed to making the best decisions in the interest of its plan participants, and plans to “vigorously defend” against the lawsuit.

“The suit is without merit and contains a number of factual inaccuracies,” Mr. Denby said.

BlackRock joins the ranks of other asset managers, such as Jackson National Life Insurance Co., T. Rowe Price, JPMorgan Chase & Co. and American Century Investments, to have been sued by their retirement plan participants for self-dealing within the last year or so.