This story announcing a class action lawsuit against Morgan Stanley for its administration of its employees’ 401(k) plan illustrates something interesting about fiduciary duty. A familiar idea is that a firm’s management has a fiduciary duty to manage the firm in its equity owners’ interests. However, interesting questions about fiduciary care arise in at least two scenarios: (i) where the firm’s products include fiduciary services—that is, products that promise fiduciary care will be exercised on the customer’s behalf; and (ii) where public policy obligates a firm’s management to exercise fiduciary care on behalf of other of the firm’s constituencies over some specified activity.
In the U.S., an example of the second type is the Employee Retirement Income Security Act of 1974 (ERISA). ERISA requires that firms choosing to offer retirement plans invest employees’ retirement funds as fiduciaries for the employees—whether or not this works to the advantage of equity owners. Does ERISA contradict the idea that a firm’s managers are fiduciaries for the equity owners? Does ERISA underwrite the “multi-fiduciary” interpretation of managerial duties sometimes articulated in the business ethics literature?
The answer to both questions is probably no. First, notice that ERISA doesn’t obligate firms to offer retirement plans, even if offering them works more to employees’ advantage than not offering them. Thus, over the question of whether or not to offer a retirement plan to employees, management’s duty of fiduciary care remains to the equity owners of the firm. Second, ERISA doesn’t obligate firms to choose the basic type of plan (e.g., defined benefit, defined contribution), or the magnitude of benefits or contributions offered, as fiduciaries for employees. These questions, too, are to be addressed by reference to the interests of equity owners. Thus, what ERISA says, in effect, to a firm’s managers is this: If you conclude that offering a retirement plan of a particular type, and with benefits or contributions of a certain magnitude, is in the interests of equity owners, you must nonetheless administer that (equity-owner-serving) plan in the employees’ interests—even if it turns out that doing so in any given instance doesn’t redound to the interests of equity owners.
Viewed that way, ERISA’s effect is similar to ordinary contract law. A firm’s management should choose whether or not to enter into a contract by reference to equity owners’ interests. However, having entered into a contract judged to be in the interests of equity owners, management must make good on its contractual duties to the other party even if this turns out not to redound to equity owners’ interests.
In the linked article, plaintiff employees allege that Morgan Stanley failed to invest employees’ retirement funds as fiduciaries for the employees—instead favoring the firm’s own financial products to the benefit of its equity owners and to the detriment of the employees, thus violating ERISA.
LINK: Morgan Stanley Faces $150M Suit Over its Own 401(k) (by Bruce Love and Alex Padalka for Financial Advisor IQ)
A $150 million class action suit against Morgan Stanley alleges the firm mismanages its employees’ retirement funds by placing them in inferior products and charging excessive fees, according to a press release from the law firm representing the plaintiffs.
The complaint also alleges that Morgan Stanley was at one point “self-dealing” by investing in mutual funds it managed itself without “thoroughly investigating” whether plan participants were better off with funds managed by third parties, according to the press release. One such fund allegedly performed at the bottom 10% among its peers, [plaintiffs’ attorney Charles] Field said in an interview with FA-IQ.
What do you think?