Morgan Stanley hit with $150 million 401(k) lawsuit for self-dealing and excessive fees

The wirehouse now joins a growing list of other financial-services companies sued for similar reasons

Aug 19, 2016 @ 3:37 pm

By Greg Iacurci

Morgan Stanley was sued Friday by a former participant in the company's 401(k) plan for excessive retirement-plan fees and self-dealing on the part of the company, which allegedly enriched itself at the expense of employees' retirement savings by offering proprietary investment funds.

The plaintiff is seeking $150 million on behalf of a proposed class for losses incurred due to the alleged breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974.

The lawsuit, Patterson v. Morgan Stanley et al, continues an ongoing theme of financial services companies being sued by employees over their retirement plans.

In the past month alone, Neuberger Berman, Franklin Templeton and New York Life Insurance Co. were sued by their plan participants for fiduciary breach in their company retirement plans. American Century was sued in late June.

“Without a doubt, there has been a general uptick in litigation against financial services companies, by plaintiffs' firms we've seen in the past and plaintiffs' firms we haven't seen in the past,” according to Thomas Clark Jr., an ERISA attorney at The Wagner Law Group.

The $8 billion Morgan Stanley 401(k) plan had six Morgan Stanley mutual funds as of the end of 2014, which were “tainted either by poor relative performance, high relative fees, or both,” according to the complaint, filed on Friday in New York district court.

The Institutional Mid Cap Growth Fund IS Share Class, for example, performed worse than 88% of mid-cap growth mutual funds for the past three years, and 87% over five years, the complaint alleges. Similarly, the Morgan Stanley Institutional Small Cap Growth Fund IS Class performed worse than 99% and 94% in 2014 and 2015, respectively, of small-cap growth funds.

“Morgan Stanley treated the Plan as an opportunity to promote Morgan Stanley's own mutual fund business and maximize profits at the expense of the Plan and its participants,” according to the lawsuit.

And aside from Morgan Stanley's own funds, several non-proprietary investments in the plan were also “poor-to-mediocre performers.”

In aggregate, Morgan's alleged fiduciary breaches caused millions in losses to plan participants, according to the plaintiff, Robert Patterson, who participated in the 401(k) plan from January 2011 through April 2014.

A spokeswoman for Morgan Stanley declined comment on the lawsuit.

The plaintiff is being represented by the law firm Sanford Heisler. It's the second ERISA excessive-fee suit the firm has filed, the first being Aug. 16 in a case against Columbia University for fees in the school's 403(b) plans.

Charles Field, partner and co-chair of the firm's financial services group, didn't discuss any specific cases it may file in the future, saying instead, “We'll take them as they come.”

Excessive-fee cases have proven fairly successful for the plaintiffs' bar over the past few years, with financial services companies such as Massachusetts Mutual Life Insurance Co., Transamerica Corp., Ameriprise Financial Inc., and Fidelity Investments settling in multimillion-dollar payouts.

ERISA fee suits have shifted outside the realm of 401(k) plans within the past two weeks, with more than 10 lawsuits targeting university 403(b) plans (defined contribution plans for nonprofit institutions) being filed.

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