Morgan Stanley, Board Accused in Suit of 401(k) Self-Dealing

  • Plan member claims mismanagement lost ‘hundreds of millions’
  • Class action seeks to represent 60,000 current and ex-workers

A former employee says Morgan Stanley knows exactly who should buy its worst performing funds: the bank’s own workers.

That’s the claim behind a lawsuit filed Friday accusing Morgan Stanley and its board of mismanaging the firm’s 401(k) retirement plan and costing 60,000 employees hundreds of millions of dollars. According to the complaint, which seeks to cover other workers, the company picked inappropriate and high-priced investments so that the bank would profit at the expense of its staffers.

The lawsuit in Manhattan highlights a friction that exists at financial-services firms that put employees into their own product. The suit cited several Morgan Stanley mutual funds included in the 401(k) that fared worse than offerings from rivals. For instance, a small-cap growth fund underperformed 99 percent of similar funds in 2014 and 94 percent in 2015, according to the suit.

Morgan Stanley sought a financial benefit for itself while causing the plan’s participants “to suffer staggering losses of hundreds of millions of dollars,” lead plaintiff Robert Patterson alleged in the breach-of-duty lawsuit. The firm “treated the plan as an opportunity to promote Morgan Stanley’s own mutual fund business and maximize profits.”

Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment on the claims.

Patterson is identified in the complaint as a Morgan Stanley retirement plan member from January 2011 to April 2014. His suit, ostensibly filed on behalf of the plan, seeks class action status for all who were enrolled in it from March 2010 to February 2016, including current and former employees. The plan manages $8 billion in assets, according to the complaint.

Best Interest

Management failed its duty to act in the best interest of plan participants by putting six Morgan Stanley mutual funds into the 401(k), some of which were “tainted” by poor performance or high fees, Patterson alleged. The suit seeks damages of $150 million.

“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,” he alleged.

Plan participants wanting to invest in a mid-cap fund were offered only Morgan Stanley’s Institutional Mid-Cap Growth Fund, which held between $200 million and $300 million in assets, according to the complaint. Morningstar Inc., an investment-advisory firm, gave that fund its worst possible rating for investors seeking to hold it for just three to five years and only a slightly better rating for those who wished to keep it for a decade, Patterson said.

Employees were also charged millions of dollars in higher fees for company mutual funds than Morgan Stanley’s outside clients, Patterson said. For instance, an international stock fund charged retirement participants the equivalent of 0.88 percent of assets under management, almost double what a similar-sized outside client would be charged.

Morgan Stanley’s investment-management business creates funds for institutional and retail clients and has $406 billion in assets under management. Daniel Simkowitz took over the business, one of three main divisions alongside the investment bank and wealth management brokerage, in October.

The case is Patterson v. Morgan Stanley, 16-cv-6568, U.S. District Court, Southern District of New York (Manhattan).

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