Morgan Stanley accused of mismanaging its 401k plan

Even Wall Street workers are unhappy with how their retirement plans are run.

A participant in Morgan Stanley’s 401k plan filed a lawsuit Friday in U.S. District Court in New York alleging that it offers investment options that have too-high fees and poor track records, including some mutual funds run by Morgan Stanley itself. The suit accuses the $8 billion plan of causing “hundreds of millions of dollars” in losses for its roughly 60,000 participants.

Morgan Stanley declined to comment on the lawsuit.

Friday’s suit is the latest in a lengthening string of complaints about high fees and poor investment choices at 401k and 403b retirement plans around the country. Franklin Templeton’s 401k plan was hit with a similar suit last month, for example. Participants filed suits against the Massachusetts Institute of Technology, New York University and Yale University earlier this month.

Each of those defendants, along with Morgan Stanley, has a plan with high ratings relative to peers from Brightscope, which analyzes retirement plans.

But Friday’s suit alleges Morgan Stanley treated the plan “as an opportunity to promote Morgan Stanley’s own mutual fund business and maximize profits” at the expense of its participants, by offering its own funds when it could have offered ones from other providers that had better performance.

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As an example, the suit cited the Morgan Stanley Institutional Small-Cap Growth fund, which it said performed worse than 99 per cent of its peers in 2014. Analysts at Morningstar call that fund an “excellent option” but also acknowledge that it’s one of the most volatile in its category, “which can make it difficult for investors to stay the course.”

The importance of having access to a good retirement plan has ballooned, given how few workers are in line to get a traditional pension. And the quality of a 401k or 403b plan depends largely on whether it has low costs and good investment options.

Investors have been paying more attention to the fees they pay on their investments. Research has shown that one of the best predictors for a mutual fund’s success is whether it has low fees. That’s for the simple reason that a high-cost fund has to perform that much better than a low-cost fund to deliver the same returns.

In recent years, dollars have overwhelmingly been flowing into mutual funds and exchange-traded funds that simply track the Standard & Poor’s 500 and other indexes. These index funds charge some of the lowest fees available, and the dollars they’ve attracted have often been at the expense of higher-cost funds run by managers looking to beat the market.

Read: Which is better: DB, DC or a third way?