“The four most dangerous words in investing are, it’s different this time.”
Sir John Templeton’s famous quip might now be replaced by “You’ve been served.” Robbins Arroyo LLP, which delightfully describes itself as a “shareholder rights” law firm, announced last week that it’s filed a lawsuit against Franklin Templeton.
The suit alleges that Franklin Resources, a division of the San Mateo, California-based mutual fund behemoth, breached its fiduciary duties to its employees.
Specifically, Robbins Arroyo claims that despite the many investment options available in the market, the plan invested hundreds of millions of dollars in proprietary mutual funds managed by Franklin Resources “because they paid fees to and generated profits for Franklin Resources and its subsidiaries.”
“Under the Employee Retirement Income Security Act, fiduciaries—such as Franklin Resources—who control the selection of plan investments and plan service providers are required to act prudently and solely in the interest of participants and beneficiaries of the plan,” the law firm writes. “As part of these duties, fiduciaries must ensure that the services provided to the plan are necessary and the fees are reasonable.”
The complaint further alleges that the proprietary funds charged plan participants and beneficiaries unreasonable fees.
For example, it notes the fees were significantly higher than the median fees for comparable mutual funds in 401(k) plans as reported by the Investment Company Institutes, and were also substantially higher than the fees available from alternative mutual funds, including Vanguard Institutional Funds with similar investment styles that were readily available as plan investment options throughout the relevant time.
“In addition, each proprietary fund charged fees in excess of the fees the plan would have paid by purchasing comparable separately managed accounts, and many of the proprietary funds had poor performance histories compared to prudent alternatives. Notably, Franklin Resources replaced the Allocation Funds with expensive, untested target date funds, which subsequently underperformed the cheaper, established alternative funds. As a result of Franklin Resources’ poor investment decisions, the plan lost over $64 million in value.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
