Morgan Stanley and Their Ugly 401(k) Lawsuit

You’d think a multinational financial services corporation specializing in economic and investment advice would be able to provide its employees with a better quality retirement plan than most other companies. But you’d be wrong, which is why Morgan Stanley currently faces a class action suit from its employees over its mismanagement of their 401(k)s.

Poor Choices, Poor Retirement Planning

When Morgan Stanley employees started their 401(k) plans, they expected money they paid in to be invested wisely, with an eye towards growing the funds as much as possible—as befits the company’s status as a top financial advisor. Instead however, the company used the opportunity to line their own pockets at the expense of their employees.

Each person saving for retirement has a different situation, and it’s the job of a financial advisor to help them find the best plan to suit their particular needs. But Morgan Stanley simply offered its employees Morgan Stanley funds, without actually doing any research to determine if another company’s fund might be better suited to their needs.

Unfortunately, the funds turned out to be a bad investment. The Morgan Stanley Institutional Small Cap Growth Fund IS Class has repeatedly proven to be one of the worst performing small cap growth funds out there. In 2014, it performed worse than 99% of other funds in its class, and in 2015 it performed worse than 95%. Clearly, employees were more than a little disappointed with these results, which is why around 60,000 of them have joined the class action suit.

Huge Hidden Fees

Being that Morgan Stanley is worth more than $8 billion, one would think they’d be able to leverage those assets to provide a better caliber of 401(k) to their employees. But if the only problem was poorly performing investments, it could be written off as bad luck, or at the worst, incompetence. However, the problem goes deeper than that.

Not only do Morgan Stanley’s retirement funds perform poorly, they charge fees that are downright ridiculous. Any financial advisor charges some fees; a set percentage taken off the top of the fund’s earnings every year. As the fund expands over the years, the fees do as well, until by the time a person is ready to retire, even a small percentage can add up to a significant slice out of their 401(k).

This can be annoying for those paying the fees, but it’s perfectly legal and certainly no reason for a class action suit. Except when the “small percentage” is actually a very big chunk. The Morgan Stanley small growth cap fund mentioned earlier carried with it a fee of 0.98% per year. A seemingly small amount, until you consider that at the Vanguard investment management company, a comparable fund has a fee of only 0.07%. To pay a fee that’s that much higher in any situation seems ridiculous. To be charged that much more for a fund that doesn’t even perform as well as the less expensive one seems downright unconscionable.

When a company sponsors a particular 401(k) plan, under the law they have a fiduciary responsibility to act in their employees’ best interests. It’s become clear Morgan Stanley hasn’t done that, instead using its employees’ funds to benefit themselves at the employees’ expense. There’s no word yet as to how this lawsuit will turn out, but if it goes in the employees’ favor, it could conceivably have a significant impact on how many companies handle their employees’ retirement funds in the future.