The U.S. Department of Labor has sided with Morgan Stanley and several FINRA arbitration decisions in a dispute over whether its deferred compensation program should be treated like a pension or a bonus and, if the latter, not be paid if a financial advisor leaves before the end of its vesting period.
In an opinion issued Tuesday, the DOL said Morgan Stanley’s deferred incentive compensation program “appears to be a bonus program,” so it qualifies for exemption under the Employee Retirement Income Security Act and is not considered an “employee pension benefit plan.” The regulator reviewed the compensation program on Morgan Stanley’s request.
The DOL’s ruling further solidifies Morgan Stanley’s five consecutive wins in arbitration cases brought before FINRA by advisors who left before their deferred compensation vested and lost the payouts. Two of those wins were in August 2025.
However, it appears to limit an opening left by a federal judge in an ongoing class action complaint brought by Morgan Stanley financial advisors in 2020. In that case, New York Southern District Court Judge Paul Gardehpe had partially ruled for the wirehouse, pushing advisors to argue their claims in private arbitration. However, he also agreed that the compensation plans were covered under ERISA, leaving an opening for them to win their cases.
This July, a federal appeals court upheld that view, shooting down Morgan Stanley’s attempt to appeal the decision that its deferred compensation plans were protected by federal law. In the dismissal, the Second Circuit Court of Appeals argued that Morgan Stanley didn’t have proper jurisdiction and denied its request that the district court judge who filed the previous opinion “strike its legal conclusion that the deferred-compensation plans” fell under ERISA.
However, in this most recent twist, the opinion issued by Jeffrey J. Turner, director of the office of regulations and interpretations for the DOL, declares that the program meets an exemption under ERISA as a bonus program.
In the opinion, the DOL provides the details of Morgan Stanley’s deferred compensation program, which makes financial advisors eligible for 25% of deferred compensation as an unsecured deferred stock award, and 75% as an unsecured cash-based award. The deferred stock is deposited into a brokerage account, and the cash-based awards are given to the advisor on the “scheduled vesting date” only when all conditions are met, the DOL noted.
“The program’s express purposes, design, administration and the conditions on the award payments support the conclusion that the awards are bonuses,” the opinion states. “Moreover, the proportion of payments to current employees (over 85% for cash awards, over 91.8% for stock conversions) compared to former employees, clearly demonstrate that such payments are only incidental and not ‘systematically deferred’ to termination of covered employment or beyond, or so as to provide retirement income.”
In prior cases brought before FINRA’s arbitration committee, Morgan Stanley financial advisors had argued that forfeiture of payment for its deferred compensation plan violated ERISA.
In a case recently heard by FINRA, Michigan-based financial advisor Patrick T. O’Neill sought to recoup deferred compensation of about $546,001 and 2,324 shares of Morgan Stanley stock, along with attorneys’ fees. O’Neill also sought to have Morgan Stanley remedy its past alleged violations of vesting rules and reform its program.
FINRA’s three-person panel ruled in favor of Morgan Stanley.
The DOL’s opinion may solidify Morgan Stanley’s case against further claims.
“It is the Department’s view that the deferred incentive compensation program appears to be a bonus program,” the DOL wrote. “The payment of a small percentage of awards to financial advisors who terminated employment before the awards’ vesting dates due to death, disability, involuntary termination or government service, is not the sort of deferral of income contemplated by ERISA section.”
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