DOL Sides With Morgan Stanley in Deferred Compensation Conflict

The U.S. Department of Labor has issued a new advisory opinion siding with Morgan Stanley and ruling that the firm’s deferred incentive compensation program is an exempt bonus program, not an employee pension benefit plan subject to the Employee Retirement Income Security Act of 1974.

The opinion is the latest development in a years-long class action suit filed by a host of former Morgan Stanley advisers. Previously reported by AltsWire, the underlying lawsuit was originally filed in 2020 and led by Matthew T. Shafer, an industry veteran with more than two decades of experience. In the lawsuit, Shafer alleges that Morgan Stanley violated federal laws by withholding deferred pay when he and other advisers left the company. According to Shafer, Morgan Stanley invoked a “Cancellation Rule,” denying him around $500,000 in deferred compensation when he moved to a competing firm in 2018.

The new advisory opinion, 2025-03A, was issued in response to a request from Morgan Stanley and addresses whether the firm’s equity incentive compensation plan and Morgan Stanley compensation incentive plan should be classified as a pension plan under ERISA. The distinction is crucial because ERISA provides protections for employees, including vesting rights, that would prevent the forfeiture of unvested benefits.

The program at the center of the dispute provides financial advisers with deferred stock and cash awards, which are contingent upon the adviser remaining continuously employed and in good standing for a period of four to six years. The awards are forfeited if an adviser leaves the firm before the vesting date or engages in prohibited conduct.

In its analysis, the DOL concluded that the program’s primary purpose is to reward good performance and incentivize financial advisers to stay with the firm and uphold its policies, not to provide retirement income. The opinion highlighted that awards are paid automatically on scheduled vesting dates and that employees cannot elect to defer payments to a later date.

While acknowledging that a small percentage of awards are paid out to former employees in limited situations, such as death, disability or involuntary termination, the DOL found that these payments are “incidental” and do not indicate a “systematic deferral” of income. The opinion cited data showing that between 85% and 92% of awards were paid to current employees.

Morgan Stanley has been in legal battles with ex-advisers on the deferred compensation issue for years. Court rulings and regulatory decisions have been mixed. Morgan Stanley won several encounters earlier this summer, as settled by the Financial Industry Regulatory Authority decisions.

Still, this new analysis is a stark departure from fall 2024 when New York Southern District Court Judge Paul Gardehpe denied Morgan Stanley’s motion to reconsider a November 2023 ruling which stated that the firm’s deferred compensation plan should be governed by federal laws. At the time Judge Gardehpe determined that Morgan Stanley’s deferred compensation programs for financial advisers were subject to ERISA.

The latest opinion, a reversal, could affect dozens of arbitration cases brought by former Morgan Stanley advisers seeking to reclaim forfeited deferred compensation. The DOL’s conclusion reinforces Morgan Stanley’s position in these disputes, as the firm has consistently argued that its program is designed for retention and good conduct, not retirement.

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