Franklin Templeton, Execs Sued Over High 401(k) Fees

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By Carmen Castro-Pagan

Franklin Resources Inc. and more than a dozen of its executives are accused of violating federal benefits law by allegedly causing the company’s $1 billion 401(k) plan to invest in high-cost, poorly performing in-house funds when better investments were available.

Since 2011, the plan has lost more than $60 million by investing in Franklin Templeton’s in-house mutual funds instead of prudent alternatives such as Vanguard funds, according to a lawsuit filed Nov. 2 in federal court in California ( Fernandez v. Franklin Ress., Inc. , N.D. Cal., No. 3:17-cv-06409, complaint filed 11/2/17 ).

The lawsuit also points out that the plan offered the company’s money market fund rather than a stable value fund—a common investment vehicle in 401(k)-type plans that is designed to preserve principal while providing a return. As a result, the plan allegedly lost more than $9 million by investing in the company’s money market fund instead of stable value alternatives.

The plan paid $6.5 million per year in investment management and administrative fees—an amount that is nearly double the cost in comparable plans—according to the lawsuit.

Franklin Templeton takes pride in its 401(k) plan, which offers a generous matching program and provides employees with a diversified lineup of investment choices, including proprietary and nonproprietary funds, a company spokesperson told Bloomberg Law Nov. 2.

The lawsuit, filed by a plan participant seeking class treatment, also targets 22 company executives and shareholders, including Charles B. Johnson, his brother Rupert H. Johnson Jr., and his two sons Charles E. Johnson and Gregory E. Johnson. Charles B. Johnson is the largest shareholder of Franklin Resources and his son Gregory is the current chairman and chief executive officer, according to their profile on the Bloomberg Terminal.

The lawsuit is the second one to target Franklin Resources’ practice of placing proprietary mutual funds in its 401(k) plan. In July 2016, Franklin Resources was accused of investing hundreds of millions of its workers’ retirement dollars in funds managed by the company and its subsidiaries even though the funds carried fees much higher than those of funds offered by competitors. In that case, a federal judge in California rejected Franklin’s attempt to dismiss the case. Earlier this year, the judge allowed the participants to proceed as a class and later rejected the company’s bid to decertify it.

This new lawsuit is “premised on the same alleged set of facts” included in the first lawsuit and “seeks duplicative relief,” a company spokesman said. The lawsuit “follows the unsuccessful attempt” by the plaintiff in the other action to “add these same additional claims and defendants,” he added. Franklin Resources will defend against both lawsuits aggressively, he said.

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 companies, refusing to dismiss cases against BB&T Corp., Insperity, Deutsche Bank, and Edward Jones. So far, only two defendants have emerged from these cases victorious: Putnam Investments LLC and Wells Fargo.

Izard Kindall & Raabe LLP, Bailey & Glasser LLP, and Creitz & Serebin LLP represent the participant.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

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

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