The shift toward low-cost passive investments has had massive implications for portfolio managers all over the world. And even those involved in managing retirement plans could be facing tough times ahead, as one case illustrates.
In the US District Court for the Northern District of California, participants in the Franklin Templeton 401(k) retirement plan filed a complaint against Franklin Resources, Inc. and the retirement plan’s fiduciary investment committee, reported PLANSPONSOR
According to the complaint, retirement-plan assets were deliberately invested in funds offered by Franklin Templeton “when better-performing and lower-cost funds were available.” Some US$750 million was allegedly invested in mutual funds managed by Franklin Templeton and its subsidiaries.
“The plan also includes a company stock fund, which invests in common stock of Franklin Templeton, and a collective trust, managed by State Street Global Advisors, which is intended to track domestic large-capitalization stocks as represented in the S&P 500 Index,” the complaint read. “In 2015, the plan also added three other collective trusts, also managed by State Street Global Advisors, to offer index tracking for international stocks, domestic small and mid-capitalization stocks, and bonds.”
While it’s not unusual for mutual-fund providers to favour their own proprietary products, plaintiffs argued that the company simply wanted to generate fees and profits for its investment-management business, in effect violating the fiduciary duty. They alleged that the fees charged for Franklin Templeton funds were and are significantly higher than median fees for comparable mutual funds.
Complainants also said that unlike other shareholders in the Franklin mutual funds, the retirement plan did not get a 15-basis point beneficial owner-servicing credit, which was paid by Franklin Templeton from those same mutual funds. Because of those payments, they said, the value of the mutual funds was reduced for all shareholders.
Had the retirement plan gotten those same credits, the plaintiffs argued, it would have received credits amounting to some US$1.1 million yearly, compared to the US$700,000 that’s currently offered to the plan. Conversely, had the current arrangement offered for the plan been applied to all shareholders, “the amount of the payments made from each fund would have been less, causing the value of the plan’s investments in the Franklin Funds to be higher,” they 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,” the plaintiffs said in their filing.
In a statement to PLANSPONSOR
, Franklin Templeton strongly denied the allegations.
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