Morgan Stanley wins 401(k) lawsuit over use of in-house and BlackRock funds

The judge's ruling described plaintiffs' claims as inappropriate 'Monday-morning quarterbacking'

Oct 10, 2019 @ 2:13 pm

By Greg Iacurci

Morgan Stanley has won a lawsuit alleging that it included high-cost, underperforming in-house and BlackRock investment funds in its company 401(k) plan, costing its employees millions of dollars in lost retirement savings.

Plaintiffs originally brought the lawsuit, Robert J. Patterson v. Morgan Stanley, in August 2016, seeking $150 million in damages as a result of breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974.

Judge Richard J. Sullivan in the U.S. District Court for the Southern District of New York dismissed the lawsuit, offering a searing critique of plaintiffs' arguments.

"Contrary to Plaintiffs' claims, ERISA does not require clairvoyance on the part of plan fiduciaries, nor does it countenance opportunistic Monday-morning quarterbacking on the part of lawyers and plan participants who, with the benefit of hindsight, have zeroed in on the underperformance of certain investment options," Mr. Sullivan said in the ruling, delivered Monday.

"More is required, and plaintiffs come nowhere close to alleging such a case in their complaint," the judge added.

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Charles Field, an attorney representing plaintiffs in the case, said he and his team are currently weighing whether they will appeal the decision.

"Naturally, we're disappointed with the ruling," Mr. Field said. "We respectfully disagree with the judge on his position."

The lawsuit is one of several cases that have been filed in recent years against financial services firms over management of their company 401(k) plans.

The cases, a subset of the increasing number of 401(k) lawsuits filed against plan sponsors, often allege that the firms used in-house funds to benefit financially from their employees at the expense of 401(k) savings. Many have settled before trial, though a few have won favorable decisions at the district court level.

Plaintiffs' allegations focused on 13 investment options — six proprietary Morgan Stanley mutual funds and seven target-date collective investment trust funds offered by BlackRock Inc. During the period targeted in the lawsuit, the funds represented roughly 40% of the assets in the Morgan Stanley 401(k) Retirement Plan, in which roughly 60,000 current and former employees have invested.

The Morgan Stanley funds, plaintiffs claimed, had excessive fees and three — a small-cap, mid-cap and global real estate fund — "performed so poorly that any reasonable fiduciary would have removed them."

Similarly, the BlackRock TDFs had "inordinate" fees and underperformed their benchmarks, according to plaintiffs.

The judge agreed with Morgan Stanley's position that plaintiffs lacked standing to bring claims associated with half of the investments. Plaintiffs, he said, collectively invested in only six of the challenged funds — the Global Real Estate Fund, International Equity Fund, Mid Cap Fund, Large Cap Fund, Emerging Markets Fund and BlackRock 2025 Trust.

However, the judge also dismissed the other fiduciary-breach claims relative to those six funds, casting aside arguments that fund fees were too high and that the funds underperformed relative to benchmarks and other comparable funds.

Plaintiffs argued, for example, that the Morgan Stanley Mid Cap Fund's 0.61% fee was excessive when compared with the Vanguard Mid-Cap Fund's 0.08% fee. However, the judge said the two "cannot be meaningfully compared" because the Morgan Stanley fund is actively managed and the other passively managed.

The fee disclosure had also notified plan participants that actively managed funds typically have higher expenses than passively managed ones, according to the judge.


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