DOL takes Morgan Stanley’s side on advisor deferred comp

The Department of Labor has weighed in on Morgan Stanley’s side in a dispute over whether the wirehouse owes unpaid “deferred compensation” to advisors who left for other firms.

The director of the DOL’s office of regulations and interpretations issued an opinion Tuesday finding that Morgan Stanley’s deferred compensation policy “appears to be a bonus program” and not a savings benefit of the type that would be protected under federal retirement law. Morgan Stanley has been locked in a series of disputes with former advisors who argue they’re entitled to deferred comp they left behind when they joined other firms.

Deferred compensation is pay that is typically disbursed after a set number of years. Much of the assault on Morgan Stanley’s deferred compensation policies has been premised on the idea that these payments are protected under the federal Employee Retirement Income Security Act of 1974, or ERISA. Morgan Stanley has instead argued that they’re bonuses designed to reward employees for remaining loyal and not running afoul of industry regulations.

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The DOL’s opinion on Tuesday emphasizes the fact that deferred compensation is usually paid to employees when they’re still on the job and rarely after retirement. Morgan Stanley’s deferred payments come in two forms: cash awards, constituting three-quarters of the total, and stock awards, making up the remaining quarter.

Most deferred comp goes to current employees, not retirees

Morgan Stanley provided the DOL with data showing that the vast majority of compensation of both kinds went to employees who were still actively employed. From 2009 to 2017, for instance, an average of 85.3% percent of all the cash payments in a given year went to current employees. And from 2009 to 2019, an annual average of 91.8% of the stock awards went to current employees.

The DOL’s conclusion: Morgan Stanley’s “deferred incentive compensation program qualifies as an ‘exempt bonus program'” under federal ERISA law.

“The express purposes of the deferred incentive compensation program are to reward financial advisors for their long-term tenure and incentive good behaviors desired by the Firm,” according to the opinion by Jeffrey Turner, the director of the DOL’s office of regulations and interpretations. “The program’s design and administration are tailored to achieve those goals and to meet the financial regulatory requirements regarding using deferred compensation to motivate good conduct and penalize bad conduct.”

Morgan Stanley declined to comment on the opinion. A spokesperson for the firm has previously said, “Morgan Stanley grants deferred compensation to financial advisors during their employment to promote retention and good guardianship. This compensation is not a pension plan.”

A ‘self-fulfilling prophecy’ with deferred comp?

Doug Needham, an attorney at Motley Rice who has filed complaints on behalf of more than 100 former Morgan Stanley advisors, said Morgan Stanley conveniently leaves out a key consideration when pointing out that most of its deferred comp payments go to current advisors. If the firm is illegally withholding compensation from advisors who’ve left to join rivals, as Needham contends, then of course it’s going to be paying far less to ex-employees.

“It’s almost a self-fulfilling prophecy,” he said. “The reason most people leave Morgan Stanley is they have another job somewhere. And if you’re only paying current employees, that’s just because you refuse to pay ex-employees.”

Needham called the DOL’s opinion erroneous on the facts and law and cast doubt on claims that it was a “win” for Morgan Stanley.

“For this to be a win, there must be an opponent,” Needham said. “And this is a one-sided rendition of facts. It’s like scoring a touchdown in football practice with no defense on the field.”

Morgan Stanley’s recent victories, and arguments about ‘double dipping’

Morgan Stanley has had a recent string of successes in rebutting former advisors’ claims to left-behind deferred compensation. Alongside its arguments that deferred comp payments are really bonuses, Morgan Stanley has increasingly accused former employees of trying to “double dip.”

Many advisors who leave for other firms are able to negotiate deals that compensate them, at least in part, for deferred compensation they left behind. Advisors who accept those incentives and then, after leaving, claim Morgan Stanley still owes them backpay are in fact asking for the same money twice, the firm argues.

Such arguments played a big role in Morgan Stanley’s victory last month over a pair of advisors who claimed they were owed just over $870,000 in unpaid deferred comp, as well as 2,616 shares in the firm, after leaving to join Wells Fargo in the 2010s.

Recent months have also seen Morgan Stanley prevail over:

But Morgan Stanley is not always victorious. In April 2024, the firm was ordered by an arbitration panel to pay more than $3 million claimed by seven former advisors. Two months later it was told to pay $1.1 million to a pair of ex-advisors who had joined Ameriprise.

Morgan Stanley pays out the cash and equity components of deferred comp on differing schedules. The cash takes six years to be disbursed, and the stock takes four.

Not all deferred comp is for active employees

Although most of the payments go to active, non-retired employees, there are instances when deferred compensation is paid to employees who have left the firm or their heirs. Those can occur when an advisor dies, is let go for reasons other than conduct or is called into government service. Deferred comp can also be paid after an advisor retires.

But Turner, in his opinion for the DOL, wrote that there is no evidence suggesting the payments were ever intended to be part of a retirement plan. For instance, he noted that deferred comp isn’t “skewed toward the last years of the participants’ careers” and that participants weren’t “selected to receive the award based on being at or near retirement age.” Turner also noted that Morgan Stanley informs its advisors every year that deferred compensation is not meant to be a retirement benefit protected by ERISA. 

A federal judge’s differing opinion on Morgan Stanley’s deferred comp

The DOL’s opinion contradicts a separate finding reached by Federal Judge Paul Gardephe, who concluded in yet another dispute over Morgan Stanley’s deferred comp that the policies do in fact fall under ERISA. Gardephe later reaffirmed his own opinion, and Morgan Stanley’s attempt to have it overturned on appeal was rejected.

Needham noted that the DOL’s opinion on Morgan Stanley’s deferred comp took into account neither Judge Gardephe’s ruling nor other relevant court cases.

“Here was a case that rejected the same arguments,” Needham said. “It was odd to me, from an initial standpoint, that they didn’t even cite the most applicable cases.”