Another asset management firm has been accused of self-dealing in the administration of its 401(k) plan.

Members of the investment committee for Franklin Templeton’s 401(k) plan allegedly cost participants tens of millions in investment losses by stacking its plan with expensive and poorly performing proprietary investment options, according to court documents filed in U.S. District Court for the Northern District of California.

The suit is the latest in a round of claims brought against large asset managers, alleging that plan fiduciaries breached their obligations under the Employee Retirement Income Security Act by offering proprietary investments. Claims have been brought against New York Life Insurance Co., Putnam Investments LLC., TIAA, and Allianz, among others.

As of September 30, 2015, assets in Franklin’s 401(k) plan totaled nearly $1.1 billion, according to Form 5500 data cited in the complaint. Franklin Templeton or its subsidiaries managed all 40 of the mutual funds offered. Allegedly, those funds lost in excess of $64 million in investments since 2010, when compared to “prudent alternatives,” like comparable Vanguard Funds, claim attorneys for the lone named plaintiff, a current employee at Franklin Templeton.

A request for comment from Franklin Templeton was made before press time, but no comment was provided.

The Franklin 401(k) plan has over 5,800 active participants, according to Brightscope.com. The complaint hopes to certify all participants in the plan from July 28, 2010 in the class action.

In an email statement, Gregory Porter, a partner at Bailey and Glasser and the lead attorney for the plaintiff listed in the complaint, said fiduciaries of 401(k) plans have obligations only to plan participants.

The question of whether or not investment management firms like Franklin Templeton could be failing fiduciary obligations to other investors in its mutual funds by not offering its proprietary products in its own 401(k) plan is irrelevant, said Porter.

“When Franklin officers make decisions for their employees' 401(k) plan they have to act solely in the interest of the plan and its participants,” said Porter. “They cannot consider the impact on the profitability of the business or on other shareholders of Franklin Templeton mutual funds.”

The allegations

Plan fiduciaries at Franklin Templeton invested hundreds of millions of dollars in its own proprietary mutual funds because they were “managed by, paid fees to, and generated profits for Franklin Templeton and its subsidiaries,” alleges the complaint against San Mateo, California-based Franklin Resources Inc., which had $732.1 billion in assets under management as of June 30, 2016, according to the company’s latest earnings report.

Prior to 2015, the 401(k) investment menu offered only one non-proprietary fund, the passively managed Standard and Poor’s 500 Index Fund, according to court documents. The plan’s proprietary investments averaged about $750 million in value annually, from 2010 to the present.

That resulted in “millions of dollars” in fees paid to Franklin Templeton and its subsidiaries, the suit says.

In May 2013, plan fiduciaries introduced cheaper R6 shares of the proprietary funds, but even those were not competitive with Vanguard funds with comparable investment objectives, allege attorneys for the plaintiff.

Beyond their costs, the complaint alleges that many of Franklin Templeton’s proprietary funds had, and continue to have poor performance histories relative to “prudent” alternatives.

In 2014, fiduciaries replaced three proprietary allocation funds with a new series of proprietary target date funds.

Cheaper alternatives with proven track records were available, the claim alleges. “A prudent, un-conflicted fiduciary would not have chosen untested, more expensive funds,” said attorneys for the plaintiff, who also allege the funds managers, which were the same managers of the replaced allocation funds, had poor track records.

Franklin’s TDFs available to plan participants were all rated in the bottom 10 percent of their Morningstar peer group during the period from January 1, 2016 to June 30, 2016, the complaint says.

And none of the other proprietary funds offered in the plan hold a five-star rating by Morningstar, the highest rating available. Three funds held a one-star rating, and another 10 proprietary funds had two-star ratings from Morningstar, according to the complain

The plaintiff also alleges the offering of a money market fund was imprudent relative to a stable value fund, causing another $9 million in losses to participants.

In 2014 and 2015, the plan paid $6.5 million per year in investment management and administrative fees, meaning the total plan cost was 57 basis points per participant, or 0.57 percent.

In 2013, 401(k) plans with more than $1 billion in assets incurred an average of total plan costs of 31 basis points, according to data from the Investment Company Institute and Brightscope cited in the complaint.

In data independent of that study, Brightscope, which rates 401(k) plans relative to peer groups, gave Franklin Templeton’s 401(k) plan good, and even excellent marks.

Its overall rating was in the top 15 percent of its peer group. Its total plan cost was rated as low, and its average account balance and the generosity of the company match are classified as “great.”

Instant Insights /

Franklin Templeton latest asset manager accused of self-dealing in 401(k) plan

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