If you’re unhappy with your 401(k), rest easy… you’re not alone. In fact, on August 19, over 60,000 employees joined up and filed a class action lawsuit against their employer, Morgan Stanley. Their reason: questionably managed and poorly performing 401(k) plans.
It’s one thing to ask workers to stay late or forget to restock the break room. Messing with their retirement plans, though? That’s a whole different animal.
The filed suit alleges that Morgan Stanley, a company with over $8 billion in 401(k) assets, chose to invest employees’ money in its own funds in order to maximize profits and benefit itself. Using only in-house investment funds would have been a questionable practice on its own. The unfortunate and compounding fact, though, is that these funds have also been grossly underperforming.
In fact, its Morgan Stanley Institutional Small Cap Growth Fund IS Class was 99% less profitable than other small cap growth funds in 2014. It didn’t get much better in 2015, where the fund performed worse than 95% of the others.
So, why would the company continue to toss 401(k) funds into obviously poor choices such as these? Self-promotion and siphoning profits for themselves are two potential reasons. The class action suit last week alleges that these were indeed the motivating factors, but it gets better.
The lawsuit also claims that on top of these 401(k) plans earning less than they could have with 99% of the other options out there, the costs were also exorbitant in comparison. It accuses Morgan Stanley of charging its own employees higher mutual fund fees than it charged outside investors.
These fees are also higher than those that other funds on the market currently carry. For instance, Morgan Stanley was apparently charging a fee of .98%, whereas a similar fund from Vanguard charged a mere .07%. The effects of this percent difference on a retirement account could be astronomical!
Of course, this would not only be shady business practice, but is potentially illegal. The federal Employee Retirement Income Security Act (ERISA) of 1974 places a fiduciary obligation on companies to act in the best interests of the plan participants. Managing funds in a way that primarily benefits the company, instead, is a potential violation.
Seeing how 401(k) plans play such a large role in the retirement savings of today’s working class, this sort of practice would have detrimental effects on the future financial security of each of their employees. Most of us pay into retirement plans and give blind faith that our employers are managing our money with our best interests in mind. Morgan Stanley, it would seem, has let a lot of people down.
It will be interesting to see how this suit plays out in court. It has the potential to be a harsh reminder of companies’ ethical and legal obligations to their workers. The class action suit is seeking damages of $150 million on behalf of its approximate 60,000 proposed participants. Morgan Stanley has not yet responded to requests for comments on the suit.
Have you worked for Morgan Stanley? Leave a comment to let us know your thoughts on their 401(k) plan and the class action lawsuit.
Published or updated August 29, 2016.