Financial Times, August 19, 2016 – Morgan Stanley sued by retirement plan members

Posted August 19th, 2016.

As it appeared in Financial Times

Ben McLannahan and Stephen Foley in New York

Morgan Stanley is being sued by a group of participants in its retirement plan, accused of gouging them on fees and steering them into underperforming funds managed for profit by the bank itself.

The suit is part of a number of recent US cases targeting big employers for offering allegedly substandard retirement plans. Class-action lawyers have won payouts for employees at companies including Boeing, Walmart and Caterpillar, and the cases have shone a light on the fiduciary duties that employers have towards plan members — including the need to offer a wide variety of cheap investment options. 

According to the suit against Morgan Stanley, which was filed on Friday in Manhattan federal court and which names current and former board directors as co-defendants, the bank failed in its duty to offer employees “prudent investment choices” within its $8bn retirement plan. Instead of using the plan’s bargaining power to benefit participants, the suit alleges, the bank selected relatively high-cost and poor-performing funds, some of which were sold by its own investment-management arm.

“A prudent fiduciary . . . would have known that the investments were not suitable,” lead plaintiff Robert Patterson said, in the breach-of-duty lawsuit. “By acting to benefit themselves . . . Morgan Stanley caused the plan, and hence participants, to suffer staggering losses of hundreds of millions of dollars.”

Morgan Stanley declined to comment.

The lawsuit is the latest in a wave of legal actions against company pension schemes launched under the US Employee Retirement Income Security Act of 1974, aimed at driving down pension fund fees.

Such cases have proven hard to win, but the US Supreme Court last year decided that employers have an ongoing duty to ensure their menu of pension fund options gives employees a fair deal.

Based on data filed with the Department of Labor, Morgan Stanley’s plan had a total return of 31.6 per cent between 2011 and 2014, excluding the bank’s own stock, according to the suit. By comparison, similar-sized funds returned 32.5 per cent at Goldman Sachs and 39.8 per cent at Citigroup.

That was a result, in part, of the plan being loaded with subpar mutual funds managed by the bank itself, the suit alleges. It cites the Morgan Stanley Institutional Mid Cap Growth Fund, which did worse than 87 per cent of peer-group funds over the past five years. A similar Morgan Stanley fund targeting small-cap stocks did worse than 99 per cent of rivals in 2014 and 94 per cent in 2015.

“A reasonable investor would view these as imprudent investments,” the suit said.

The suit also alleges that plan members paid fees that were higher than those the bank charged outside clients with similar assets and investment strategies. The Morgan Stanley International Equity Fund, for example, charged the plan fees equal to 0.88 per cent of assets, or about $2.2m a year — roughly double the fees charged to a separate, external account.

Mr Patterson, the lead plaintiff, is identified in the complaint as a Morgan Stanley retirement plan member from January 2011 to April 2014. His suit seeks class-action status for all who were enrolled in the plan from March 2010 to February 2016, including current and former employees.

Sanford Heisler Sharp, LLP is a nationwide litigation law firm with offices in New York, Washington, DC, San Francisco, San Diego, Nashville, and Baltimore. We represent individuals against powerful interests. We act as a private attorney general in support of the private and public good.

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