Morgan Stanley (MS) Accused of Mismanaging 401(k) Plan
Morgan Stanley MS and its Board of Directors have been accused of mismanaging the company’s 401(k) retirement plan, costing its roughly 60,000 employees hundreds of millions of dollars in losses.
A participant in Morgan Stanley’s 401(k) retirement plan, Robert Patterson, filed a lawsuit in the U.S. District Court in New York, alleging the company of offering inappropriate and high-priced investment options, including some mutual funds run by the company itself. The suit seeks damages worth $150 million.
Mishandling of 401(k) Plan Led to Losses
The lawsuit alleges that most of Morgan Stanley’s mutual funds included in the retirement plan performed poorly compared to its peers. Per the complaint, the small-cap growth fund included in the 401(k) plan underperformed 99% of its comparables in 2014 and 94% in 2015.
Further, the plan has $8 billion worth of assets under management, of which $200–$300 million of funds were invested in institutional Mid-Cap Growth Fund of the bank. This fund was given the worst possible rating by Morningstar Inc., for investors seeking to hold it for three to five years, and only a slightly better rating for those holding it for a decade.
According to the federal Employee Retirement Income Security Act, companies that deal in 401(k) plans hold a fiduciary responsibility to act in the best interest of their employees. However, Morgan Stanley used its own low-quality funds, which were known for poor results and high fees, without considering other funds in the market. Further, the employees were charged higher fees for the company’s mutual funds, compared to Morgan Stanley’s outside clients.
Robert Patterson, the lead plaintiff in the breach-of-duty lawsuit, stated “The firm treated the plan as an opportunity to promote Morgan Stanley’s own mutual fund business and maximize profits. Morgan Stanley 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.”
Robert Patterson has been identified as a retirement plan member from Jan 2011 to Apr 2014. He has demanded a class action status for his lawsuit, including current and former employees who were part of the retirement plan from Mar 2010 to Feb 2016.
What Next?
Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices.
Morgan Stanley should start taking care of these issues, which can otherwise impact the company’s business as well as lead to a rise in legal expenses.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
Some better-ranked finance stocks include Meta Financial Group, Inc. CASH, Comerica Incorporated CMA and Flagstar Bancorp Inc. FBC, each sporting a Zacks Rank #1 (Strong Buy).
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