Most Claims in Franklin Templeton Self-Dealing Suit Moved Forward

However, a federal judge gave the firm a win on a claim that its recordkeeping fees were unreasonable.

Although she moved forward most claims in a self-dealing lawsuit against Franklin Templeton Resources, U.S. District Judge Claudia Wilken of the U.S. District Court for the Northern District of California granted the firm’s cross-motion for partial summary judgment on the breach of fiduciary duty claim as to the reasonableness of Franklin Templeton’s 401(k) recordkeeping fees.

Wilken denied the plaintiff’s and Franklin Templeton’s cross-motions for summary judgment on the prohibited transaction claims, finding there is a triable issue regarding whether the defendants’ alleged prohibited transactions fall under Prohibited Transaction Exemption (PTE) 77-3. The suit alleges that defendants “breached their fiduciary duties by causing the plan to invest in funds offered and managed by Franklin Templeton (Franklin funds), when better-performing and lower-cost funds were available.” The lead plaintiff further alleges that defendants were “motivated to cause the plan to invest in Franklin funds to benefit Franklin Templeton’s investment management business.” Further, the suit alleges that defendants “offered the plan inferior arrangements compared to that offered to non-captive plans, and, in so doing, engaged in prohibited transactions.”

She also denied the defendants’ cross-motion for partial summary judgment on the plaintiff’s breach of fiduciary duty claim as to his stable value fund theory, finding there is a disputed issue of material fact as to whether the defendants fulfilled their fiduciary duty in adequately considering their investment options.

According to Wilken’s order, the administrative committee monitors the plan’s administrative fees and records and evaluates reports from the plan’s recordkeeper. From at least December 1, 2005, to April 1, 2009, the committee retained The 401(k) Company as the plan’s recordkeeper. The 401(k) Company was then acquired by the Schwab Retirement Plan Services Company. The recordkeeping fee during the relevant class period was $70 per participant per year.

A process in place

Wilken found that there is no disputed issue over the reasonableness of the administrative committee’s oversight of the plan’s recordkeeping efforts and reasonableness of fees. She pointed out that the defendants established that the administrative committee had in place a process to determine and subsequently oversee recordkeeping fees. It was charged with both recordkeeping and “regularly insuring that the plan is competitive by looking at the plan relative to the market.” In 2005, the committee solicited a bid for various recordkeeping services through a request for proposals (RFP). The committee issued another RFP in 2012 as part of its responsibilities to solicit and evaluate candidates to provide recordkeeping services.

With the assistance of Callan Associates, the committee evaluated four recordkeeper candidates. During this process, Callan identified a list of suitable recordkeepers for consideration. Callan also drafted a questionnaire and analyzed the responses for the committee’s consideration. The committee ultimately switched from Schwab to Bank of America Merrill Lynch (BAML) and secured a lower fee of $48 dollars per participant in 2014.

According to the court document, the plaintiff argues that, despite this process, the committee did not engage in any meaningful and real evaluation of recordkeeping fees. Specifically, he complains that the defendants chose BAML over JP Morgan Chase (JPM) although JPM quoted a lower price. The plaintiff also argues that the defendants’ recordkeeping fees and the oversight of such fees were unreasonable because the committee had “criteria for selecting a recordkeeper [that] were skewed to favor Franklin proprietary funds.”

However, Wilken found that the plaintiff’s citations do not support these assertions and appear to be misplaced.

Further, she found that the defendants present evidence that the plan’s recordkeeping fees are reasonable. Their expert opines that the administrative expenses incurred by the plan are comparable to those of similarly-sized plans, and the plaintiff has not provided any contrary admissible evidence and appear to concede the point.

“Because plaintiffs have identified no evidence that the seventy dollars per participant fee was not reasonable and not comparable to similar plans, and appear to concede that the fees were reasonable, it follows that plaintiffs have not presented evidence that they were harmed by any alleged ‘unreasonable’ recordkeeping process,” Wilken concluded.