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

Hugh Son and Andrew Harris
Bloomberg News

A former employee says Morgan Stanley knows exactly who should buy its worst performing funds: the bank’s own workers.

That’s the claim behind a lawsuit accusing Morgan Stanley and its board of mismanaging the firm’s 401(k) retirement plan and costing 60,000 employees hundreds of millions of dollars. According to the complaint, which seeks to cover other workers, the company picked inappropriate and high-priced investments so the bank would profit at the expense of its staffers.

The lawsuit 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.

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 Morgan Stanley spokeswoman, declined to comment on the claims.

Management failed 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, Patterson alleged.

The suit seeks damages of $150 million.

Plan participants wanting to invest in a mid-cap fund were offered only Morgan Stanley’s Institutional Mid-Cap Growth Fund, according to the complaint. Morningstar Inc., an investment-advisory firm, gave that fund its worst possible rating for investors seeking to hold it for just three to five years and only a slightly better rating for those who wished to keep it for a decade, Patterson said.