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Participants in the Franklin Templeton 401(k) Retirement Plan who sued the company over the plan’s in-house mutual funds got permission to move forward as a certified class ( Cryer v. Franklin Resources, Inc. , N.D. Cal., No. 4:16-cv-04265, order issued 7/26/17 ).
The lawsuit, which involves the retirement benefits of more than 5,000 plan participants, qualifies for class treatment because it raises common questions about Franklin Templeton’s conduct and because it seeks recovery on behalf of the plan as a whole, a federal judge ruled July 26. 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 percent 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 the past three years, more than two dozen financial companies—including JPMorgan Chase Bank, Charles Schwab Corp., and Morgan Stanley—have been targeted by proposed class actions challenging the in-house investment products in their workers’ 401(k) plans. Many judges have ruled against the financial company defendants, refusing to dismiss cases against BB&T Corp., Insperity, Deutsche Bank, American Century, and Edward Jones. Judges have granted class status to the investors suing Allianz and Putnam, although Putnam later defeated the case against it.
Some companies targeted for in-house 401(k) investments have negotiated settlements, including Principal Life ($3 million), New York Life ($3 million), TIAA ($5 million), and American Airlines ($22 million).
In granting class status to the Franklin investors, the judge also rejected the idea that the lead plaintiff had waived his right to participate in a class action. The California-based federal judge said that both class action waivers identified by Franklin were unenforceable under the U.S. Court of Appeals for the Ninth Circuit’s 2016 decision in Morris v. Ernst & Young LLP. That decision has been appealed to the U.S. Supreme Court, which will hear arguments in the case on Oct. 2.
Franklin also argued that the named plaintiff lacked standing because he didn’t invest in every challenged fund and because some of the funds he invested in may have outperformed competitors. The judge disagreed, saying that the investor sought relief on behalf of the plan as a whole. Further, the investor didn’t lose standing simply because he withdrew his funds from the plan, the judge said, citing Ninth Circuit precedent.
Finally, the judge largely rejected the parties’ request to keep relevant documents—including the 401(k) plan document and Franklin’s alternate dispute resolution procedures—confidential.
Judge Claudia Wilken of the U.S. District Court for the Northern District of California wrote the decision.
Creitz & Serebin LLP, Bailey Glasser LLP, and Izard Kindall & Raabe LLP represent the investors. O’Melveny & Myers LLP represents Franklin.
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