A federal district court judge has granted Morgan Stanley’s motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit accusing it of various fiduciary breaches.

Participants in Morgan Stanley’s 401(k) plan filed the lawsuit in 2016 on behalf of approximately 60,000 current and former plan participants, alleging the plan included investment options with excessive fees and used Morgan Stanley proprietary funds rather than other funds that would have been better and cheaper for participants.

In his opinion, U.S. Circuit Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York first agreed with the Morgan Stanley defendants that the plaintiffs lack standing to bring claims related to seven of the 13 challenged funds because they did not invest in those seven funds. Citing a previous case in the 2nd U.S. Circuit Court of Appeals, Sullivan wrote, “Generally a plaintiff may sue on behalf of a putative class—including those members of the putative class who did not suffer the exact same injury as the plaintiff—where he ‘plausibly alleges (1) that he personally has suffered some actual injury as a result of the putatively illegal conduct of the defendant, and (2) that such conduct implicates the same set of concerns as the conduct alleged to have caused injury to other members of the putative class by the same defendants.” He dismissed the plaintiffs’ claims regarding the seven non-selected funds.

“Viewed at a high level, plaintiffs’ challenges to the Selected Funds and Non-Selected Funds raise similar questions—for example, whether the fees paid to Morgan Stanley were inappropriately high, whether the funds were improperly retained, and whether defendants’ desire to develop a business relationship with BlackRock motivated defendants to keep the BlackRock Trusts in the plan,” the decision explains. “But the evidence that plaintiffs will have to put forward to establish liability will vary from fund to fund, and plaintiffs’ ability to establish liability as to decisions made in connection with one fund will do little to advance their case for liability as to other funds.”

Turning to the remaining claims, Sullivan noted that the plaintiffs alleged that the defendants breached their fiduciary duties by offering proprietary funds at higher advisory and administrative fees than it did to separate account clients with similar assets and investment strategies. According to the opinion, the plaintiffs did not allege Morgan Stanley breached its fiduciary duty of loyalty by including its proprietary funds in the plan or by charging higher fees to participants in the plan than to outside investors in the same funds.

Sullivan concluded that the duty of loyalty claim alleges either the defendants did not offer plan participants the opportunity to invest in separate accounts that replicated the strategies of the Morgan Stanley funds, but with reduced fees, or the defendants should unilaterally discount the fees of the funds in the plan to equal those charged to separate account clients. He basically decided that nothing in ERISA requires a plan to offer separate accounts in lieu of reasonably priced mutual funds, and nothing in ERISA requires Morgan Stanley to offer plan participants discounted fees or reduce market-based fees to equal those charged to separate account clients just because the funds are offered in an ERISA plan.

The plaintiffs also asserted that the defendants breached their duties of loyalty and prudence by continuing to offer the Mid Cap Fund and Global Real Estate Fund in the plan’s investment menu. Sullivan pointed out that the duty of prudence standard in ERISA focuses on a fiduciary’s conduct in arriving at an investment decision, not on its results. The plaintiffs cannot rely on hindsight. He also noted that just after a 2016 prospectus was made public, showing deficient performance of the Mid Cap Fund, the defendants removed that fund from the plan’s investment menu.

Sullivan said, even assuming the plaintiffs’ allegations were not based on hindsight, their showing that the Mid Cap Fund had a return that was one percentage point less than its benchmark is not sufficient to support the claim that the defendants were imprudent in retaining the fund prior to its removal from the plan.

As for the Global Real Estate Fund, Sullivan also found the plaintiffs’ claims were hindsight-based, and that the plaintiffs provided insufficient facts to support their comparison of the fund’s performance to a “supposedly comparable investment.” He also found that the plaintiffs did not provide sufficient evidence to support the notion that Morgan Stanley continued to offer the funds in the plan in order to collect what they said were “excessively high” fees.

Sullivan’s conclusions were similar regarding the plan’s offering of a BlackRock fund—that performance claims were hindsight-based and there was not sufficient evidence to support their assertion that Morgan Stanley’s motivation for continuing to offer the fund was to have a business relationship with BlackRock.

The plaintiffs also alleged the Morgan Stanley defendants engaged in prohibited transactions by investing plan assets in the proprietary funds and by permitting those funds to deduct annual fees from the plan assets invested in the funds. Sullivan found Morgan Stanley’s actions satisfied Prohibited Transaction Exemption (PTE) 77-3.

In dismissing the case, Sullivan wrote, “Contrary to plaintiffs’ claims, ERISA does not require clairvoyance on the part of plan fiduciaries, nor does it countenance opportunistic Monday-morning quarter-backing on the part of lawyers and plan participants who, with the benefit of hindsight, have zeroed in on the underperformance of certain investment options. More is required, and plaintiffs come nowhere close to alleging such a case in their complaint.”