Proprietary Funds Draw Another Suit — and a Separate ‘Investigation’

By Nevin Adams • September 07, 2016 • 0 Comments
A second, separate proprietary fund suit has been filed against a financial services firm — and a separate law firm is looking for plaintiffs to pursue litigation regarding Morgan Stanley’s 401(k).

M&T Bank has been slapped with a second class action lawsuit (Allen v. M&T Bank Corp., W.D.N.Y., No. 1:16-cv-00704, complaint filed 9/1/16), charging that in “selecting and retaining the mutual funds run by affiliated companies, Defendants have acted at all times in the interest of the Company, and have not acted solely in the interests of the Plan participants as is required of a fiduciary under ERISA.” A similar class action was filed against the bank earlier this year in the same court (the U.S. District Court for the Western District of New York).

The suit begins by noting that, rather than “delegating all fiduciary responsibility for the Plan to external service providers, the Company chose to assign the appointment and removal of fiduciaries to the Committee, whose members were selected by the Company itself.” Moreover, the suit alleges that “Defendants acted in the interests of the Company, to the detriment of the Plan and its participants and beneficiaries, by including mutual fund investments from the Company itself or a subsidiary in the Plan that were more expensive than comparable investments and investments with poor performance compared to benchmarks and their peers,” and not only does the suit allege that the plan fiduciaries chose to do so out of “self-interest, they failed to disclose the conflict of interest to Plaintiff and members of the Class.”


The plaintiff claims that the plan fiduciaries:

  • Selected investments for the plan with higher administrative fees than were available on the market for similar or identical investment products from other providers.

  • Failed to monitor the performance of these investments.

  • Refused to remove the investments which performed well below their benchmarks and their competitors.

  • Chose actively managed funds rather than less expensive passive alternatives.

  • Failed to use collective trusts instead of mutual fund options that would have further minimized fees to the plan and its participants, “wasting millions of dollars.”

The suit goes on to note that even though the plan offered “access to a self-directed brokerage account (SDBA) which would allow Plan participants to invest in thousands of options, including stocks and mutual funds,” the SDBA had “even more fees than the investments typically available to plan participants, including account fees and trading fees. Further, those who invested in the mutual funds of their choice would have faced fees higher than those available to the Plan, because they would have to have purchased retail shares…”

The lawsuit claims that the plan paid Wilmington Trust Investment Advisors (WTIA) and/or other M&T subsidiaries nearly $1.88 million in fees for the $255.1 million in assets under management in proprietary funds in 2010, noting that that corresponds to an expense ratio of nearly 0.74, which plaintiff Jacqueline Allen alleges was “well above what the Plan should have been paying given its size.”

The suit runs through a litany of funds on the plan menu, citing statistics that indicate not only that they lagged fund benchmarks, but also comparable funds that were all already on the plan menu.

The suit also alleges that the plan fiduciaries failed to “have in place a method of systematic review both of the Plan’s individual investment options and of the portfolio as a whole in order to ensure that the investments were suitable and appropriate for the objectives of the Plan,” and that they “further breached their duties of loyalty and prudence by failing to divest the Plan of these proprietary funds when they knew or should have known that it was not a suitable and appropriate Plan investment,” going on to charge that the defendants “further breached their duties of loyalty and prudence by failing to ensure that participants liquidated their investments in the Proprietary funds and transferred the sale proceeds to the other investment options available in the Plan.”

This most recent suit was brought by Kessler Topaz Meltzer & Check, LLP of Radnor, Penn. and Trevett Cristo of Rochester, N.Y.

‘Investigating’ Morgan Stanley?

Meanwhile, Seattle-based Keller Rohrback L.L.P. says it is investigating recent reports that Morgan Stanley mismanaged its employees’ 401(k) plan and engaged in illegal self-dealing. In a press release, the firm claims that “the Morgan Stanley 401(k) Plan is loaded with high-expense low-return investment options, many of which are proprietary Morgan Stanley mutual funds.” The firm then provides contact information for individuals who might be interested in pursuing a claim.

Just a couple of weeks ago the law firm of Sanford Heisler, LLP filed a class complaint in the U.S. District Court of the Southern District of New York “detailing the many ways in which Morgan Stanley violates basic fiduciary duties under ERISA and abuses its employees’ trust by mismanaging their retirement funds.”