The Department of Labor has stepped into a complex legal battle involving Morgan Stanley, weighing in on whether the firm’s deferred compensation plans for financial advisors fall under the scope of federal retirement law. The answer, according to the agency, appears to be no—an outcome that could shield Morgan Stanley from millions of dollars in potential liabilities.
For years, former Morgan Stanley advisors have pursued claims in arbitration alleging that the firm improperly withheld deferred compensation after they departed to join competing firms. The advisors argue that Morgan Stanley’s practices violate the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that governs retirement and benefit plans. Morgan Stanley, in turn, has consistently maintained that its deferred compensation programs do not qualify as ERISA-covered plans, framing them instead as incentive bonuses tied to performance and retention.
The Labor Department’s Sept. 9 advisory opinion supports Morgan Stanley’s position. The agency determined that the firm’s deferred compensation arrangements appear to function as a bonus program and therefore fall outside of ERISA’s jurisdiction. The opinion was issued in response to an Aug. 1, 2024 request from Morgan Stanley’s outside counsel, Kent A. Mason of Davis & Harmon.
In his request, Mason characterized the deferred compensation as incentive-based awards designed to reward production, retention, and compliance with firm standards. He argued that a 2023 federal court ruling had created uncertainty by concluding that Morgan Stanley’s plans were subject to ERISA, a determination that threatened the firm’s ability to continue operating such programs effectively.
While Mason declined further comment, the Labor Department acknowledged that ERISA coverage is generally a fact-specific question and not one it typically opines on. Still, the department stated that the materials presented by Morgan Stanley did not indicate circumstances that would cause the arrangement to be considered a pension plan under ERISA.
The immediate impact of this advisory opinion remains unclear. Dozens of arbitration cases are already in progress, with advisors collectively seeking tens of millions of dollars in deferred compensation. Outcomes so far have been mixed. On Aug. 8, an arbitration panel rejected an advisor’s $546,000 claim, and less than two weeks later, another panel denied claims totaling $1.3 million plus interest from two other advisors. As is standard, neither panel provided reasoning for its decision.
Attorneys representing advisors argue that the Labor Department’s conclusion may not hold up under closer scrutiny. Douglas Needham of Motley Rice, who represents several former Morgan Stanley advisors, criticized the process. He noted that advisory opinions are non-adversarial and based solely on materials provided by the requesting party. “They only heard one side of the story,” Needham said. “We’ll continue to present our side in arbitration.”
At the heart of the dispute is Morgan Stanley’s compensation model. Like many large broker-dealers, the firm pays its advisors through a mix of upfront cash and deferred awards tied to revenue production. According to documents filed in federal court, advisors’ deferred compensation can range from 1.5% to 15.5% of their total pay, depending on production levels. Advisors contend that these deferrals function much like retirement contributions and therefore should be subject to ERISA’s vesting and anti-forfeiture protections.
The legal fight dates back several years. In 2022, a group of advisors filed a federal lawsuit seeking class-action status against the firm. They alleged that Morgan Stanley’s deferred compensation program unlawfully deprived them of vested benefits in violation of ERISA.
In that case, Judge Paul Gardephe ruled that the claims had to proceed through arbitration, as required by the advisors’ agreements with the firm. At the same time, however, he concluded that Morgan Stanley’s plans were covered by ERISA, creating a significant challenge for the firm as it defended itself in arbitration.
Morgan Stanley sought to have Gardephe amend his ruling to remove the ERISA finding, but he declined in January 2024. The firm then attempted to appeal, arguing that the ruling amounted to an “effective denial” of arbitration. The appeals court rejected that effort in July, calling Morgan Stanley’s argument “unprecedented” and unsupported by case law.
For wealth advisors and RIAs, the implications of this ongoing dispute extend beyond the legal maneuvers. Deferred compensation remains a powerful retention tool across the wirehouse and brokerage landscape, designed to reward top producers while discouraging them from moving to competitors. If courts or regulators were to determine that such programs fall under ERISA, it could significantly alter how firms structure advisor pay, adding compliance burdens and limiting forfeiture provisions that firms rely on to retain talent.
The Labor Department’s advisory opinion may provide Morgan Stanley with a measure of relief, but it does not carry the force of a judicial ruling. Arbitrators remain free to decide cases on the facts before them, and the mix of outcomes to date suggests that the issue is far from settled. With millions of dollars in play and reputational stakes high, both Morgan Stanley and its former advisors are preparing for a prolonged battle.
For practicing advisors, the case is a reminder of the importance of carefully reviewing the terms of deferred compensation arrangements and understanding the legal framework—or lack thereof—that governs them. Unlike traditional qualified retirement plans, these programs may not provide the same protections around vesting, portability, and forfeiture. Advisors weighing career moves must factor in the risk of losing deferred compensation if they depart for another firm, particularly as wirehouses lean more heavily on such programs to retain top talent.
As the arbitration cases continue and potential appeals surface, the broader wealth management industry will be watching closely. The outcome could shape not only Morgan Stanley’s policies but also how competitors design their own compensation structures. For now, the Labor Department’s opinion offers Morgan Stanley an important talking point in defending its practices, but the final word will likely come from the arbitrators and courts still weighing the merits of advisors’ claims.
Whether this ultimately leads to changes in how deferred compensation is regulated—or simply reinforces the contractual risks advisors assume—remains an open question. For advisors and RIAs navigating career decisions or structuring firms’ own incentive plans, the Morgan Stanley case underscores the need for clarity, caution, and strategic foresight in dealing with one of the most consequential elements of advisor compensation.
