Morgan Stanley and Top Universities Sued for Breaches of Fiduciary Duties Under ERISA with Respect to their Employees’ Retirement Funds

By Thomas J. McNamara

Class actions seeking hundreds of millions of dollars have been brought against Morgan Stanley, Columbia University, and a host of other top universities, alleging breaches of fiduciary duties under ERISA with respect to the investment options provided to their employees in their retirement accounts. A class action complaint alleges that Morgan Stanley manages investments of more than $272 billion for its clients, and that its own 401(k) plan holds more than $8 billion of assets. Morgan Stanley is charged, however, with steering its employees into Morgan Stanley’s own affiliated investment funds, which are alleged to be either underperforming in returns, or which charge excessive fees. The fiduciary duties imposed by ERISA require retirement plan trustees to act in the best interests of plan participants and beneficiaries, rather than their own interest.

A wave of class action complaints have recently been filed against Columbia University, and many of the nation’s leading universities, including M.I.T., N.Y.U., Yale, Duke, Johns Hopkins, University of Pennsylvania, Vanderbilt, Northwestern, and Cornell, alleging that their employees were provided with investment options which had subpar performances or charged excessive fees. The stringent fiduciary standards imposed upon plan trustees by ERISA have made these lawsuits attractive to class-action law firms.

Next year the focus will likely shift from claims against retirement plan trustees to claims against investment advisers. The U.S. Department of Labor has enacted new regulations which will impose a fiduciary duty upon brokers and other financial advisers making recommendations to investors concerning their retirement accounts, such as IRA’s and 401(k) accounts. This means that recommendations made by brokers or financial advisers will not only have to be “suitable” for the investor, as currently required, but will have to be in the “best interest” of the client as well. In other words, an adviser could face liability for making a recommendation concerning one suitable investment over another if the particular recommendation was made just because the adviser would earn a greater commission or other compensation.

We see a perfect storm brewing. Consider the fact that more baby boomers are retiring and will be dependent on their retirement accounts; add the fact that the Federal Reserve has fostered a near zero interest rate environment, causing people to make riskier investments in order to chase yield; and throw in a higher fiduciary standard for good measure. As investment losses occur, more claims are likely to be brought, with an additional cause of action alleging breach of fiduciary duty. To further complicate matters, the SEC is considering its own fiduciary duty rules, which would apply, if enacted, to non-retirement accounts as well.

Thomas J. McNamara is a Partner in the Commercial Litigation Group of Certilman Balin.

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