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August 19, 2016 01:00 AM

Morgan Stanley, board accused in lawsuit of 401(k) self-dealing

Bloomberg
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    Bloomberg

    Morgan Stanley and its board were accused of mismanaging the firm's 401(k) retirement plan and costing 60,000 employees hundreds of millions of dollars by picking inappropriate and high-priced investments, some of which were managed for the firm's own profit.

    The lawsuit, filed Friday in Manhattan federal court, 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% of similar funds in 2014 and 94% in 2015, according to the lawsuit.

    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 spokeswoman for Morgan Stanley, declined to comment on the claims.

    Mr. 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.

    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, Mr. Patterson alleged. The lawsuit 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,” Mr. Patterson alleged.

    Employees were also charged millions of dollars in higher fees for company mutual funds than Morgan Stanley's outside clients, Mr. Patterson said. For instance, an international stock fund charged retirement participants the equivalent of 0.88% 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.

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