Compliance

Lawsuit Accuses Morgan Stanley of Self-Dealing in 401(k)

The lawsuit also says there were investment options other than proprietary options that underperformed and charged excessive fees.

By Rebecca Moore editors@strategic-i.com | August 19, 2016

A participant in Morgan Stanley’s 401(k) plan has filed a lawsuit on behalf of approximately 60,000 current and former plan participants alleging the plan included investment options with excessive fees and used Morgan Stanley proprietary funds rather than other funds that would be better and cheaper for participants.

Morgan Stanley tells PLANADVISER it does not have a comment at this time.

According to the complaint, Morgan Stanley failed to honor its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by not using its sophistication and the plan's bargaining power to select lower-cost, better-performing investment options for participants. Instead, the complaint says,  the firm selected and retained relatively high-cost and poor-performing investment options, some of which were managed for profit by Morgan Stanley. “By acting to benefit themselves and contrary to their fiduciary duty, Morgan Stanley caused the plan, and hence participants, to suffer staggering losses of hundreds of millions of dollars,” the complaint states. 

The lawsuit accuses Morgan Stanley of loading the plan with mutual funds managed by Morgan Stanley, without thoroughly investigating whether plan participants would be better served by investments managed by unaffiliated companies. For example, it says, the investment performance of the Morgan Stanley Institutional Mid Cap Growth Fund IS Class performed worse than 88% and 87% of mid cap growth mutual funds for the past three years and five years, respectively. Similarly, the Morgan Stanley Institutional Small Cap Growth Fund IS Class performed worse than 99% of funds in 2014 and 94% in 2015 for small cap growth funds. 

The complaint alleges that the fees Morgan Stanley charged its mutual funds in the plan were higher than the fees it charged its outside clients with like assets and similar investment strategies. 

According to the lawsuit, Morgan Stanley also failed to select investment options and monitor their investment performance with the skill, care and prudence required by ERISA. It says Morgan Stanley offered a variety of target-date portfolios, but calls out the portfolios managed by BlackRock.  “Morgan Stanley continued to retain these portfolios despite the fact that BlackRock Institutional Trust Co. NA, was being sanctioned at the time by both the Securities and Exchange Commission and the Commodity Futures Trading Commission for violations of federal laws and regulations. The BlackRock Target Date Funds underperformed relative to their respective investment benchmarks and the Vanguard target date funds with comparable investment strategies,” he complaint states. 

The lawsuit says there were also a number of other investment options that underperformed relative to their benchmarks and other available options with comparable investment strategies.