In a string of lawsuits against 401k and 403b lawsuits filed by plan participants focused recently on universities and financial services companies, Morgan Stanley is the latest to be named. The lawsuit alleges high fees and poor performing funds, especially ones managed by the firm.
Recent cases have been filed against other firms active in the defined contribution (DC) like Franklin Templeton, NYLife, American Century, and Neuberger Berman but Morgan Stanley is a bit different. Along with managing DC assets, they also advise DC plan sponsors through a network of over 18,000 advisors. The estimated 250,000 that manage DC plans, along with their broker dealer, will have to navigate through the DOL’s conflict of interest rule effective April 10, 2017 which will require that more of them act as a co-fiduciary leading to even more litigation according to some legal experts.
At the heart of the lawsuits against DC plan sponsors is the societal shift that has taken place as organizations, and now public entities, are moving from employer directed defined benefit (DB) pension plans to participant directed DC plans like 401ks and 403bs. Under DB plans governed by trust law, the employer is responsible for selecting investments and negotiating fees as well as the liability if the plan does not adequately prepare their employees for retirement. Under DC plans, the employer selects investments and negotiates fees but employees are responsible for any unfunded retirement liability.
DC plan sponsors have two primary fiduciary responsibilities:
- Design the plan in the sole interest of the participants; and
- Make sure that the fees are reasonable.
Many lawsuits, especially the recent one against Morgan Stanley, are alleging that the plan sponsor did not adequately negotiate fees and, that by including poor performing proprietary funds, the plan was not in the sole interest of the participants.
When responsibility for investments, fees and plan design is made by a party not financially responsible for the results, it’s tempting to leverage that position for the benefit of the company while not vigorously negotiating or prudently designing the plan for optimal results which has been a problem under the way that ERISA, using trust law, is written. That gap seems to be filled by lawsuits using equity law principles.
