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World’s Largest Asset Manager Slapped With Proprietary Fund Suit

Another investment manager has been sued by one of its own 401(k) plan participants for “corporate self-dealing at the expense of a company’s own retirement plan.”

The most recent class action suit was filed in a federal district court in California by former BlackRock employee Charles Bairdais. BlackRock, which is the world’s largest asset manager, with $5.1 trillion in assets under management, has approximately $1.56 billion in assets and approximately 9,700 participants in its 401(k) plan.

Affiliated Funds

The suit notes that almost all of the fund options offered to BlackRock employees and participants are funds affiliated with BlackRock, Inc., and that “as a result of the Fiduciary Defendants’ disloyal and imprudent monitoring, several BlackRock Proprietary Funds that would have been removed by a prudent and loyal fiduciary remained in the Plan…”. The suit alleges that “…participants were subjected to higher hidden fees through excessive fund layering, where one BlackRock fund invests in a rabbit hole of other BlackRock funds.” The plaintiff alleged that, “in this layering scheme, each BlackRock fund charges additional fees to employee investors and those unnecessary layers of fees cannibalize the returns of the employee.”

Approximately 92.9%, or $1,390,551,546, of the plan’s assets were invested in entities affiliated with BlackRock, according to the suit, which notes that “by selecting BlackRock’s own Proprietary Funds, the Investment Committee Defendants ensured that BlackRock would receive the substantial fees paid with Plan assets and would increase BlackRock affiliates’ assets under management (“AUM”).”

‘Layers of Fees’

The suit notes that in total, 21 of the BlackRock proprietary funds offered to employees through the plan funnel the employees’ retirement assets into other BlackRock funds that charge additional fees (which it claims are not reported in the expense ratio), “thereby eroding the participants’ returns.” Indeed, the suit notes that in some cases, a single BlackRock fund is funneled into as many as an additional 27 BlackRock proprietary funds.

The suit takes particular aim at each of the 10 BlackRock LifePath Funds, alleging that they “funnel employee retirement assets into 27 additional BlackRock proprietary funds, which results in at least 26 additional layers of fees” and that “by acting to benefit themselves and contrary to their fiduciary duty, the Fiduciary Defendants caused the Plan, and hence participants, to suffer losses through excessive fees and underperformance of over $60 million.” As of Dec. 31, 2015, the BlackRock LifePath funds made up $509,916,830.00, or 34.07%, of the plan’s assets, all of which were comprised of BlackRock proprietary funds, according to the suit.

Not only does the suit contend that the LifePath funds underperformed the Vanguard target-date funds (by approximately 8.5% on average for the period between Dec. 31 2010 and Dec. 31, 2015, after taking into account the compounding of returns realized every year), and “…underperformed the Dow Jones Target Date indices by almost 20% during this period.” Additionally, the suit notes that “underlying each Vanguard fund investment are only six additional funds: a master trust and five index funds,” a structure it says “…comes in stark contrast to the 27 additional funds and attendant expenses underlying each LifePath investment.”

TSP Comparison

The suit also notes that BlackRock was hired to manage the assets underlying the TSP funds (namely the C, F, G, I and S Funds), that they “…applied many of the same strategies in the C, F, G, I and S Funds as it did for the funds underlying the LifePath funds,” and that “…after taking into account the compounding of returns realized every year, the LifePath funds underperformed the TSP funds by 5.6% on average during this period.”

Finally, as has been alleged in other suits, the plaintiffs take issue with the fact that the BlackRock plan “only offers three passively managed index funds: the BlackRock U.S. Debt Index Fund, the BlackRock Russell 1000 Index Fund, and the BlackRock MSCI ACWI-ex US IMI Index Fund” … “even though the actively managed equity funds that the Investment Committee Defendants selected were more expensive and demonstrated a consistently worse performance than the passively managed index funds.”