Franklin Resources Can’t Get 401(k) Fee Lawsuit Dismissed

By Jacklyn Wille

Franklin Resources Inc. lost its bid for quick dismissal of a lawsuit claiming that it stuffed its workers’ 401(k) plan with in-house mutual funds that carried excessive fees and performed worse than competitors’ funds ( Cryer v. Franklin Resources, Inc. , N.D. Cal., No. 4:16-cv-04265-CW, 1/17/17 ).

A federal judge on Jan. 17 refused to dismiss the lawsuit, which alleges $64 million in lost retirement savings, after finding that the claims of high fees and poor performance involved factual questions that couldn’t be resolved in the early stages of litigation. The judge also found that the plaintiff, who cashed out of Franklin’s 401(k) plan in 2016, wasn’t contractually barred from bringing class action claims of fiduciary breach under the Employee Retirement Income Security Act.

The decision will be important for future litigation brought on behalf of ERISA-governed plans, Gregory Y. Porter, counsel for the worker suing Franklin, told Bloomberg BNA.

“This ruling makes important precedent for ERISA litigation in the area of interpreting releases signed by terminated employees,” Porter, a partner with Bailey & Glasser LLP in Washington, said. “The court held that an individual release does not release a plan participant’s right to sue on behalf of the plan under ERISA section 502(a)(2).”

Franklin Resources—which does business as Franklin Templeton Investments—is one of many financial companies to face class action claims over the in-house investment funds in their workers’ 401(k) plans. Many of these lawsuits have seen early success, with courts refusing to dismiss cases against BB&T Corp., Allianz Asset Management of America, Putnam Investments LLC and Deutsche Bank. Similar challenges are pending against Morgan Stanley, Wells Fargo & Co., American Century Services LLC, New York Life Insurance Co., and Neuberger Berman Group LLC.

Case Moves Forward

In this case, Franklin is accused of investing hundreds of millions of its workers’ retirement dollars in funds managed by the company and its subsidiaries, even though these funds carried fees between 57 and 1,100 percent higher than those of comparable funds offered by Vanguard. The lawsuit also challenges Franklin’s decision to include a money market fund in the 401(k) plan instead of a stable value fund that would have provided “inflation-beating returns.”

In seeking dismissal, Franklin argued that comparing its mutual funds to Vanguard funds would be like “apples to oranges,” because the Vanguard funds are passively managed index funds, while the Franklin funds are actively managed. The judge said that Franklin “may well be able to prove” that the Vanguard funds weren’t comparable, but doing so involved factual questions that couldn’t be resolved on a motion to dismiss.

Franklin also argued that the plan participant who filed suit, Marlon Cryer, signed a covenant not to sue and thus couldn’t litigate this case on behalf of the plan. The judge disagreed, finding that the agreement Cryer signed didn’t bar him from bringing fiduciary breach claims on behalf of the plan as a whole.

Judge Claudia Wilken of the U.S. District Court for the Northern District of California issued the opinion.

Cryer is represented by Bailey & Glasser, Creitz & Serebin LLP and Izard Kindall & Raabe LLP.

Franklin Resources didn’t immediately respond to Bloomberg BNA’s inquiries about the lawsuit.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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