If you're a plan sponsor who's offering proprietary funds in your employees' 401(k)s, proceed with caution.

Robert L. Reynolds Putnam Investments President and CEO

Two asset managers, BlackRock and Putnam Investments, face charges of self-dealing in their retirement plans. Plaintiffs in both cases allege that the firms prioritized their fund businesses over their fiduciary duties as plan sponsors.

The allegations pose an interesting conundrum: asset managers, in theory, believe that they offer some of the best funds available to investors. So, as fiduciaries of their companies' retirement plans, shouldn't asset managers offer proprietary funds to participants?

Feinberg, Jackson, Worthman & Wasow, LLP and Cohen Milstein Sellers & Toll are representing the plaintiff in the case against BlackRock. Nichols Kaster PLLP and Block & Leviton LLP are representing the plaintiffs in the case against Putnam.

BlackRock represents one of the first pure-play asset managers involved in a self-dealing suit. Typically, defendants in these cases are both asset managers and recordkeepers (Putnam is an affiliate of Empower).

In BlackRock's case, the plaintiff, Charles Baird, claims that the world's largest asset manager should have used its investing knowledge and bargaining power to benefit participants, our sister publication, 401kWire reports. Instead, the complaint alleges that the plan sought to maximize fees through a system of layering, where BlackRock-affiliated funds funneled assets into a network of additional proprietary funds, and charged participants the fees on all of them.

According to the filing, a total of 21 funds offered in BlackRock's retirement plans used this system of layering. There were instances where a single fund placed assets into an additional 27 funds.

To prove underperformance, the complaint against BlackRock compares performance to similar Vanguard offerings, an argument that was shot down last week by a Judge William G. Young of the U.S. District Court for the District of Massachusetts in Putnam's self-dealing case. The judge said that comparing Putnam to Vanguard was like comparing apples to oranges, InvestmentNews reports.

Future defendants in similar cases, including the suit against BlackRock, may want to take a lesson from the ruling in Putnam's favor.

BlackRock's plan has approximately $1.56 billion in assets and 9,700 participants.

PlanSponsor and InvestmentNews also covered BlackRock's suit.  

Edited by: Katy Golvala


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