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Summary Judgment Moves (Mostly) Fall Short in Proprietary Fund Suit

Both parties in a proprietary fund suit lost most of their attempts to make their case without going to trial.

The ruling from Judge Claudia Wilken of the U.S. District Court for the Northern District of California involved two separate suits brought by participants in Franklin Templeton’s 401(k) plan that were combined earlier this year. Lead plaintiffs Nelly Fernandez and Marlon H. Cryer had alleged similar fiduciary breach claims, including claims that the plan invested in funds offered and managed by Franklin Templeton, when “better-performing and lower-cost funds were available,” motivated to do so by the benefits to Franklin Templeton’s investment management business.

The suits also allege that the plan fiduciaries decided to replace allocation funds of the plan with target date funds shortly before or during 2014, at which time they chose the “untested, expensive Proprietary Target Date Funds, despite the poor performance of its managers managing similar Asset Allocation Funds.” The suit also criticized the plan for offering a proprietary money market fund, rather than a stable value fund (“paying Franklin up to 47 bps per year, while paying nothing at all to the Plan and its participants”), and that it lost in excess of $9 million during the class period as a result of losses sustained by the money market fund compared with stable value alternatives.

“Summary judgment or summary adjudication is properly granted when no genuine and disputed issues of material fact remain,” Judge Wilken noted, going on to explain that, “…when, viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. Moreover, the moving party bears the burden of showing that there is no material factual dispute" – and therefore, “the court must regard as true the opposing party's evidence, if supported by affidavits or other evidentiary material.”

Essentially, Judge Wilken found that triable issues of fact remained with regard to all of the claims save one: the reasonableness of the recordkeeping fees. The plaintiffs here had failed to show that the $70 per-participant fee wasn’t reasonable and not comparable to similar plans, she ruled. “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’ record-keeping process.”

Judge Wilken noted that the plan fiduciaries had issued an RFP in 2012 “as part of its responsibilities to solicit and evaluate candidates to provide recordkeeping services,” and that with Callan’s assistance, the committee evaluated four recordkeeper candidates, ultimately switching from Schwab to Bank of America Merrill Lynch (BAML), while securing a lower fee of $48 per participant, in 2014. The plaintiffs had argued that, despite the process, the committee “did not engage in any meaningful and real evaluation of recordkeeping fees,” specifically that the plan fiduciaries “chose BAML over JP Morgan Chase (JPM) although JPM quoted a lower price,” also claiming that the committee had “criteria for selecting a recordkeeper ... [that] were skewed to favor Franklin Proprietary Funds.”

“However,” Judge Wilken wrote, “Plaintiffs’ citations do not support these assertions and appear to be misplaced.”

Viewing the evidence in light most favorable to Plaintiff, the Court also found “a disputed issue of material fact as to whether the lack of rebates for the Plan placed Plan participants in a less favorable position than other investors, if non-Plan participants’ 401(k) plans could receive such rebates.”

Wilken also rejected Franklin Templeton’s argument that certain prohibited transaction claims were time-barred under ERISA because the class representative had actual knowledge of when the in-house funds and their related fees were added to the plan. “Mere knowledge of the purported transaction itself does not amount to knowledge that the transaction would be a violation,” she wrote.

The case is Cryer v. Franklin Resources Inc., N.D. Cal., No. 4:16-cv-04265-CW, 11/16/18.