Proprietary Fund Suit Proceeds

A provider charged with loading up its own plan with proprietary funds has lost its bid for an early dismissal of the case.

The case, Cryer v. Franklin Resources, Inc. (N.D. Cal., No. 4:16-cv-04265-CW, 1/17/17), was brought in the U.S. District Court For the Northern District of California by plaintiff Marlon Cryer, a former employee of Franklin Templeton and participant in the firm’s 401(k) plan.

The suit claims that the plan invested in funds offered and managed by Franklin Templeton, when “better-performing and lower-cost funds were available.” As has been the custom in such cases, the plaintiff alleges that the defendants were motivated to cause the plan to invest in Franklin Funds to benefit Franklin Templeton’s investment management business.

Dismissal Grounds

Cryer was terminated on Feb. 12, 2016, and the next day signed a “Confidential Agreement and General Release” that, among other things, noted that the plaintiff did not (emphasis ours) release “any right that relates to … the Employee’s vested participation in any qualified retirement plan.”

Franklin Resources (which, of course, does business as as Franklin Templeton Investments) had moved for summary judgment, arguing that the plaintiff’s complaint violates the covenant not to sue contained in the agreement he signed when he was terminated. However, the plaintiff argued that this covenant not to sue cannot extend to his claim for breach of fiduciary duty because he was suing on behalf of the plan and its participants — a point that Judge Claudia Wilken found compelling.

Franklin Resources also sought dismissal on grounds that the breach of fiduciary duty claim fails as a matter of law because ERISA expressly permits a financial services organization to offer proprietary “common or collective trust fund[s] or pooled investment fund[s].” However, Judge Wilken noted that the alleged failure wasn’t about the firm offering its own mutual funds, but about “offering only its own products, including mutual funds and the money market fund, which charged higher fees than and performed poorly as compared to available comparable non-proprietary funds and products.” Moreover, the plaintiff alleged that those decisions were made in order to allow Franklin Templeton “to collect the excessive administrative and investment fees.”

Judge Wilken noted that in considering a motion to dismiss, the court had to look at allegations in the light most favorable to the non-moving party, and that, while “the Defendant may well be able to prove that these alternatives were not comparable or that they did not perform better in the long-run, but the Court may not resolve such factual questions at the motion to dismiss stage.”

And so, the case will proceed.

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