Franklin Templeton Sued for Using Own Funds in 401(k) Plan

According to the court document, Franklin’s retirement plan includes 40 mutual funds that it or its subsidiaries manage. It also offers employees the ability to invest in a company stock fund and three collective trusts, managed by State Street Global Advisors, that track international investing indexes.

Compared with similar Vanguard products, the Franklin Income Fund has a 192% higher fee, the plaintiffs argue. The excess of fees charged jumps to 1,100% for a large-cap value fund and to 1,275% for a frontier markets fund. (For instance, the Franklin Frontier Market Fund has a fee of 165 basis points vs. 12 for the similar Vanguard fund.)

“Additionally, each proprietary fund charges fees in excess of the fees the plan would have paid by purchasing comparable separately managed accounts,” the complaint said. “With an operating margin of over 37%, very high for the mutual fund industry, defendants made a fortune off of the plan’s investments in proprietary funds. Many of the proprietary funds had and continue to have poor performance histories compared to prudent alternatives defendants could have chosen for inclusion in the plan.”

Are more lawsuits like the one against Franklin Templeton likely to emerge?

“Any plan that includes a sponsor’s own proprietary funds that have higher fees than their class or are not at the top ranking of performance for their class is at particular risk [of a suit],” said attorney Carol Buckmann of Cohen & Buckmann in a recent blog post.

“Plans covering the provider’s own employees always raise self-dealing charges,” Buckmann wrote. “The essence is that the fiduciaries have operated the plan so as to receive management fees from the investment of plan assets in their own funds, even when the investments are not in the interest of the participants.”