In short, Franklin Templeton is accused of self-dealing. The employer used the employees’ retirement savings for its own corporate benefit, rather than offering investment choices which would have allowed employees to act in their own best interest. If you watch the traffic in recent pension plan lawsuits, this seems to come up a lot.
Poor Choices, Expensive to Maintain
Between 2011 and 2016, Nelly Fernandez invested her 401(k) money in four funds managed by her employer, Franklin Templeton. These were the Mutual Global Discovery Fund, the Income Fund, the Templeton World Fund, and the Mutual European Fund. The investment options offered by Franklin Templeton varied somewhat during the total period in question, but one thing stands out.
All but one were either managed by Franklin Templeton, included Franklin Templeton stock or otherwise closely tied to the employer. These investments generated fees and profits for Franklin Templeton and its subsidiaries.
Many of them have also had poor performance histories compared to similar alternatives available from other investment managers. The investing community recognized this. Between 2015 and 2017, outside investors fled Franklin Templeton’s mutual funds in droves.
In the fiscal year ending September 30, 2015, according to the Complaint, investors withdrew $59.2 billion from Franklin Templeton funds. The following quarter, they withdrew an additional $20.6 billion. In 2016, investors withdrew another $42.5 billion. In 2017, investors withdrew an additional $18.3 billion during the first half of the year. Informed opinion was a big thumbs down.
In addition, the fees charged to plan participants for the management of these poorly performing funds appears to have been far higher than usual. With an operating margin of over 37 percent, Franklin Templeton allegedly made a fortune off of the 401(k) plan’s investments in proprietary funds.
A Tale of What Might Have Been
Breach of fiduciary duty cases like these can be difficult to argue for a variety of reasons. First of all, there is nothing wrong with a decision by a plan’s investment committee, made in good faith and after reasonable consideration, to offer an investment option that turns out to be a dud. Plan fiduciaries are not ultimately responsible for investment performance.
There is also nothing wrong with a decision, on the part of an employer who is also an investment manager, to offer the opportunity to invest in funds that it manages. It is actually quite a common practice.
These things, however, may be evidence of a legal problem. The ERISA fiduciary standards require those responsible for making investment decisions on behalf of a plan to discharge their duties solely in the interest of the participants and beneficiaries:
• for the exclusive purpose of providing benefits and defraying the reasonable expenses of administering the plan;
• with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and
• by diversifying the investments of the plan so as to minimize the risk of large losses.
This is a very exacting standard. Nowhere in there is the expectation that the employer/fiduciary/investment manager should be able to make a little money, too. One hand does not wash the other, here.
The task for the plaintiff in breach of fiduciary duty cases, however, is to demonstrate what investment performance would likely have been in the absence of a breach of these standards. This is tough because the case is about what might have been. These are highly statistical arguments based on historical data about investment returns and are generally good bedtime-reading for insomniacs.
A Well-worn Path
Perhaps surprisingly, though, there are quite a few cases like this. Although the details of the funds offered are different, Cervantes v. Invesco also involved another investment manager that loaded its 401(k) plan with its own funds.
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The fact that Fernandez will continue as a class action lawsuit bodes well for plan participants. There is strength (and access for potential plaintiffs) in numbers. That previous lawsuits have blazed a trail for these somewhat complicated cases is also a source of strength. Plan participants who believe that their retirement savings have been used to boost the bottom line for their employers at the expense of their own financial security should take notice.