BlackRock TDFs Called Out in 401k Excessive Fee Case

The lawsuit contends layering of BlackRock proprietary funds within its TDFs causes excessive fees for plan participants.

By Rebecca Moore | April 07, 2017
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Charles Baird, an employee of Barclays from 2000 until 2009, when Barclays was acquired by BlackRock Institutional Trust Company, and an employee of BlackRock from 2009 until July 2016, has filed suit against the firm, claiming the use of proprietary funds in its 401(k) plan caused the plan participants to incur excessive fees.

In a statement, BlackRock said, “The suit is without merit and contains a number of factual inaccuracies. We will vigorously defend against the action. BlackRock is committed to making the best decisions in the interest of our plan participants, continually looking for ways to help them secure a better financial future.”
According to the complaint, the plan has approximately $1.56 billion in assets and approximately 9,700 participants. “Combined with BlackRock’s investment sophistication, the Plan has enormous leverage to demand and receive superior investment products and services,” the complaint says.

The plan fiduciaries are charged with failing to honor their fiduciary duties under the Employee Retirement Income Security Act by selecting and retaining high-cost and poor-performing investment options, with excessive layers of hidden fees that are not included in the fund expense ratios. The complaint notes that almost all of the fund options offered to BlackRock employees and participants are funds affiliated with BlackRock, Inc., meaning managed and/or maintained by a subsidiary of BlackRock, Inc., such as BlackRock Institutional Trust Company, N.A. or BlackRock Advisors, LLC.

The complaint contends that several BlackRock proprietary funds that would have been removed by a prudent and loyal fiduciary remained in the plan during the class period (April 5, 2011, through judgment in the case).

“Plan participants were subjected to higher hidden fees through excessive fund layering, where one BlackRock fund invests in a rabbit hole of other BlackRock funds. 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,” the complaint says. “In total, 21 of the BlackRock Proprietary Funds offered to employees through the Plan funnel the employees’ retirement assets into other BlackRock funds, which charge additional fees (not reported in the expense ratio), thereby eroding the participants’ returns.”

The lawsuit alleges that in some cases, a single BlackRock fund is funneled into as many as an additional 27 BlackRock proprietary funds, and the majority of the BlackRock proprietary funds in the plan performed worse than their respective benchmarks and other comparable non-proprietary funds with similar investment strategies.

The fees charged by the BlackRock Proprietary Funds in the Plan (most of which were hidden in excessive fund layering) were higher than the fees charged by comparative funds with like assets and similar investment strategies. “The Fiduciary Defendants failed to remove and replace the BlackRock Proprietary Funds despite the fact that the continued investment of Plan assets in such funds constituted violations of ERISA’s duties of prudence, loyalty and constituted self-dealing and prohibited transactions,” the complaint says.

NEXT: TDFs comparison with Vanguard and the TSP