SAN FRANCISCO (CN) – A former employee of the largest private money manager in the world says in a federal class action that the company violated ethics rules by putting employees’ investments into company-run funds to rack up fees and boost profits.
In a class action filed in the Northern District of California on April 5, Charles Baird says BlackRock placed its employees’ retirement money into layers of funds managed by BlackRock, racking up fees and costing retirees an estimated $60 million.
“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,” Baird says in the complaint. “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.”
Blackrock is relatively new to the asset-management sector, but it has quickly ascended to a prominent position in the industry with about $5.1 trillion in assets under its purview – making it the world’s largest asset manager.
Guided by its CEO and founder Larry Fink, BlackRock began organically and through acquisitions and savvy investing grew quickly over 25 years into one of the more formidable Wall Street firms.
Baird worked at Barclays, a major multinational bank headquartered in London, from 2000 until 2009.
In 2009, BlackRock acquired Barclays Global Investors unit for about $13.5 billion. The unit included the exchange trade fund unit, I Shares, which has become increasingly popular as an investment tool.
Baird continued working for BlackRock through 2016, according to the complaint.
Shortly before filing the class action, Baird says he investigated the BlackRock Retirement Savings Plan and discovered that it was underperforming funds of a similar caliber offered by Vanguard and other similar financial institutions.
“For example, despite charging a 500 to 871 percent premium, BlackRock’s Low Duration Bond Fund has underperformed Vanguard’s alternative over ten, five, three, and one year horizons,” Baird says in the complaint.
The reason for this is not poor money management, according to Baird, but because BlackRock wants to funnel their own employees’ investments through a series of their funds so it can charge fees that drive company revenues.
This practice amounts to corporate self-dealing and is a violation of the Employee Retirement Income Security Act of 1974, Baird says in the 43-page complaint.
Baird seeks orders to require BlackRock to set up a trust where the ill-gotten gains are placed to the benefit of retirees; an end to BlackRock using its funds as part of its retirement savings package; and the removal of those responsible for implementing the program.
BlackRock did not return an email seeking comment by press time.
Baird is represented by Nina Wasow of Feinberg, Jackson, Worthman and Wasow based in Oakland, California.