DOL Opinion Fuels Clash Over Whether Morgan Stanley’s Adviser Pay Is Really an ERISA Plan

A recent legal saga, which involved a U.S. Department of Labor advisory opinion, has intensified a high-stakes battle over Morgan Stanley’s deferred compensation program, raising fresh questions about whether the firm’s flagship incentive-pay arrangement is, by design, an ERISA-governed pension plan.

At issue is whether Morgan Stanley’s formula for awarding and delaying incentive pay to thousands of advisers is a straightforward bonus plan, as the DOL recently argued, or a pension plan governed by the Employee Retirement Income Security Act, as a New York federal court previously concluded.

The distinction matters. If it is considered an ERISA pension plan, the program would face strict funding, vesting and fiduciary requirements and the employer might structure pay differently. If courts ultimately lean toward the DOL’s reading, however, companies may have more leeway to maintain long vesting schedules and performance-based incentives without triggering federal pension rules. Former Morgan Stanely advisers have already sued the DOL opposing the DOL stance. Many expect the outcome of the case could determine whether similar executive compensation plans fall under ERISA or not.

Court vs. DOL: Very Different Interpretations

In the underlying case, a federal district court in the U.S. 2nd Circuit Court of Appeals took what experts describe as an unusually narrow view of what counts as a “bonus” plan. Because the incentive award amount was tied in part to revenue generated by each adviser, the court labeled it a “commission,” not a bonus—a distinction that ultimately pushed the entire arrangement into ERISA territory.

The court also relied heavily on the statutory phrase “results in the deferral of income to termination of employment or beyond,” says Don Mazursky, a partner in and chair of the executive compensation and employee benefits practice at law firm Smith, Gambrell & Russell LLP. Under the court’s reading, even if only one participant were paid after leaving the firm, the plan could be considered an ERISA pension arrangement.

“That’s a very extreme interpretation,” Mazursky says. “Under the court’s approach, hundreds of employees could receive their bonuses while still employed, but a single post-employment payment would still convert the entire program into a pension plan.”

The court further dismissed features that typically characterize bonus plans—including multi-factor-award formulas, behavior-based eligibility requirements and the fact that payments are normally earned in one year and paid out the next.

Why the DOL Sees It Completely Differently

The DOL’s advisory opinion takes the opposite view.

The DOL noted that bonus programs often use complex formulas, include tenure-related rewards and sometimes allow payouts after certain types of termination from the program, such as death or disability. None of those features, in the agency’s view, automatically transform an incentive plan into a pension plan designed to provide retirement income.

“The opinion is really consistent with how companies have structured these incentive programs for years,” says DeMario Carswell, a counsel in law firm Miller & Chevalier’s ERISA practice. “It restores clarity after a very outlier decision from the court.”

But because advisory opinions are formally binding only on the party that requests them—in this case, Morgan Stanley—the agency’s interpretation is influential, not controlling, in other litigation, Carswell says.

What Happens If the Court’s Decision Stands

If Morgan Stanley’s plan is ultimately deemed an ERISA pension plan, the consequences would be sweeping, experts say.

ERISA requires full vesting after three years of service—a requirement that would override the rolling, multi-year vesting structure Morgan Stanley uses to retain talent, according to Mazursky.

If you begin employment on January 1, 2021, and accumulate at least 1,000 hours worked by the end of 2023, you will be 100% vested on January 1, 2024, in an ERISA plan, Mazursky explains. This means, under the ERISA vesting rules, after three years of service, you become fully vested based on your employment duration. However, this structure poses challenges for employee retention and plan effectiveness, he says.

Moreover, under ERISA, pension benefits, unlike top-hat executive compensation plans, must be funded by establishing a trust at the time benefits are earned, safeguarding the assets from creditors. However, being vested means you would be subject to taxation, another way structuring this plan as a pension would be problematic, Mazursky says.

“This plan wouldn’t work at all as a pension plan,” he says.

If Courts Follow the DOL Instead

If appellate courts defer to the DOL’s reasoning, employers will retain significant flexibility in how they design long-term incentive pay—but with some practical guardrails.

Companies would likely review their formulas to ensure awards are not tied purely to revenue targets; add additional performance or behavioral factors; and closely monitor how often awards are paid after employment ends.

“The longer the vesting and payment deferral periods, the greater the exposure,” Mazursky says.

In one example, a company with a seven-year vesting schedule ultimately reclassified its plan as a top-hat ERISA plan because turnover rates made post-employment payouts too likely, he added.

What Employers Should Consider

Regardless of the outcome in the courts, benefits lawyers say companies with similar deferred compensation programs should start reassessing their plan design and:

• Review award formulas to ensure they incorporate factors beyond revenue;
• Evaluate turnover and vesting patterns to determine the likelihood of post-employment payments;
• Shorten vesting periods or payment windows if needed to reduce ERISA risk; and
• Consider top-hat plan treatment if long vesting is critical for retention.

“You have to be very careful in designing these,” Carswell says. “One small change in how awards are structured can push you toward or away from ERISA.”