Franklin Templeton, Execs Must Defend Second 401(k) Fee Challenge

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

Franklin Resources Inc., which operates as Franklin Templeton Investments, and its executives must defend additional allegations that the investment firm shortchanged workers by offering expensive, underperforming proprietary funds in the firm’s 401(k) plan.

The lawsuit was filed last year and is the second to challenge Franklin Templeton’s use of in-house funds in its 401(k) plan. It was timely, not duplicative, and included sufficient factual allegations to survive the firm’s request for dismissal, Judge Claudia Wilken of the U.S. District Court for the Northern District of California held April 6.

In her ruling, Wilken consolidated the case with the previous lawsuit, filed in 2016 against Franklin Templeton. Wilken also refused to dismiss the earlier lawsuit and granted class certification. However, she rejected the request of the worker who filed the suit to amend it to bring claims for prohibited transactions against Franklin Templeton executives.

In both cases, she rejected Franklin Templeton’s arguments that a worker’s termination agreement that included a claim release and a covenant not to sue precluded the two workers who filed the separate lawsuits from maintaining their actions.

Wilken’s latest decision means that not only Franklin Templeton, but also its executives, will have to defend allegations that the firm offered affiliated, underperforming mutual funds, a money market fund rather than a stable value fund, and charged excessive fees to the detriment of its employees. The firm and its executives also face claims that they engaged in prohibited transactions under the Employee Retirement Income Security Act.

The case against Franklin Templeton and its executives is one of a number of challenges against financial institutions that offer affiliated funds in their retirement plans. Workers have sued more than 20 firms alleging the funds carry high fees and perform poorly compared to other available investment options. So far this year, judges have refused to dismiss such allegations against Edward D. Jones & Co. LP and JPMorgan Chase Bank N.A.

Franklin Templeton manages more than 100 mutual funds that invest in international and domestic stocks; taxable and tax-exempt money market instruments; and corporate, municipal, and U.S. government bonds, according to Bloomberg data. Most of its revenue come from investment management fees that account for more than 65 percent of company revenue and are directly tied to its assets under management.

Izard Kindall & Raabe LLP, Bailey & Glasser LLP, and Creitz & Serebin LLP represent the workers. O’Melveny Myers LLP represents Franklin Resources.

The case is Fernandez v. FranklIn Res., Inc., 2018 BL 123298, N.D. Cal., No. 4:17-cv-06409-CW, order denying defendants’ motion to dismiss and for summary judgment 4/6/18.

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