Franklin Templeton’s parent company is being sued by employees with 401(k) accounts who are accusing the investment manager of using its own funds in the retirement plan instead of better, cheaper funds.
The class-action suit, filed in the U.S. District Court for the Northern District of California on Thursday by Marlon H. Cryer, an investor in the plan, and others, alleges that Franklin Templeton’s retirement plan invested in funds offered and managed by the company, despite the fact that “better-performing and lower-cost funds were available.” The plaintiffs also accuse the fund group of investing in Franklin Funds to benefit its own investment management business.
“Despite the many investment options available in the market, the plan has invested hundreds of millions of dollars in mutual funds managed by Franklin Templeton and its subsidiaries,” the complaint explained. “These investment options were chosen because they were managed by, paid fees to, and generated profits for Franklin Templeton and its subsidiaries.”
For its part, “We are reviewing the complaint and do not have a comment at this time,” the San Mateo, California-based fund group said in a statement.
A number of asset managers are being hit with similar lawsuits by employees, such as New York Life Insurance Co. and American Century.
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.”