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Morgan Stanley’s Employees Sue Over Bad 401(k) Investments

With approximately 60,000 employees participating in its 401(k) program, Morgan Stanley should be positioned to offer an outstanding retirement investment package. However, a group of employees is now seeking class action status as they sue the investment firm for mismanagement of the company’s 401(k) plan.

Balance in digital background / A concept of technology law or tIn the complaint, plaintiff Robert Patterson alleges that Morgan Stanley only made poorly performing investments available in its 401(k) program. The suit argues that instead of abiding by the Employee Retirement Income Security Act, which states that employers have a fiduciary responsibility to act in the best interests of plan members, Morgan Stanley routinely chose to include some of its least successful funds in the company 401(k).For instance, the available mid-cap fund was Morgan Stanley’s own Institutional Mid-Cap Growth Fund. Investment advisory firm Morningstar, Inc., gave this fund the worst rating for investors who held an interest in the fund over a period of several years. The small-cap fund that Morgan Stanley offered to its employees fared even worse. It underperformed 99 percent of all similar funds in 2014, and its performance didn’t improve much in the subsequent year.

Moreover, the lawsuit claims that Morgan Stanley was charging outrageous fees. Patterson and his co-plaintiffs allege that Morgan Stanley was charging their employees considerably more than outside clients were being charged. In some cases, employees were charged twice the going rate for outside clients.

In the complaint, lawyers for the plaintiffs argue that the company “selected their proprietary funds not based on their merits as investments, or because doing so was in the interest of plan participants, but because these products provided significant revenues and profits to Morgan Stanley.”

Other financial management firms like Edward Jones and Franklin Templeton have been hit with similar lawsuits in recent months. Several high-profile educational institutions like Yale University, the Massachusetts Institute of Technology and Johns Hopkins University have also been accused of similar mismanagement. With lawsuits like these on the rise, it is more important than ever before for employers to ensure that their 401(k) plans comply with ERISA and other applicable legislation.