A former Merrill Lynch advisor filed a class action suit against the wirehouse, alleging it violated federal law by withholding deferred compensation pay.
California-based Kelly Milligan filed the suit in North Carolina federal court, alleging that he left $500,000 in deferred compensation on the table when he departed Merrill Lynch in 2021.
He filed the class action suit on behalf of more advisors he claimed were in a similar predicament, with his attorney estimating over 1,000 others also lost their deferred compensation.
According to Milligan, the wirehouse invoked its “Cancellation Rule,” in which Merrill would purportedly mandate advisors forfeit the compensation in plan accounts if they left the firm before a “vesting” date (a contractually allotted amount of time the employee must be with the company before benefitting from the plans).
According to the complaint filed late last month, advisors would automatically allocate a portion of their commissions each year to the “WealthChoice Contingent Award Plan.” Those commissions would be allocated into individual plan accounts, which would “vest” within eight years. According to the complaint, at least 5% of an advisor’s pay would be withheld yearly.
Milligan argued the plan was an “employee benefit pension plan” because it resulted in a deferral of employees’ income that extended to that employee’s termination (or even past it). Therefore, it was protected under the Employee Retirement Income Security Act.
According to the complaint, the total of an advisor’s deferred compensation from the previous year would be granted to that advisor as an annual “plan award,” with an account for each year’s deferred compensation. Advisors could invest their accounts in 401(k)s, with account values tied to investment performance.
However, according to Milligan, Merrill denied him his deferred compensation when he left the wirehouse in 2021, invoking the aforementioned “Cancellation Rule.” He requests that the court affirm his plan was covered under ERISA, making Merrill’s attempts to deny the money illegal.
Doug Needham, an attorney with the law firm Motley Rice representing Milligan in court, told WealthManagement.com that Merrill’s plan violates ERISA by mandating advisors forfeit their deferred compensation if they leave for another company.
“We believe the ‘cancellation rule’ violates ERISA every time Merrill Lynch invokes it and forces an advisor to forfeit deferred compensation,” he said. “And as a practical matter, advisors leaving to join a new company like Mr. Milligan did is likely the most common reason that Merrill Lynch invokes the cancellation rule.”
After the vesting date, Merrill is supposed to pay the advisor the total deferred compensation. Still, Merrill can cancel the account balance if the advisors’ employment at Merrill ends before the date in question (though there are exceptions for death, disability and layoffs, provided the advisor doesn’t solicit firm employees or clients during that time).
The rule doesn’t apply if an advisor retires (as long as they don’t “engage in competition” with the firm before the vested date), according to the complaint.
Milligan stressed that deferred compensation awarded after the vested date could not be construed as a “bonus” (which would put it outside of ERISA protections), arguing advisors don’t have to do anything beyond what’s expected of them to earn the commissions that make up the allocations in their plan (i.e., they don’t have to hit specified revenue targets).
“Indeed, (advisors) automatically received deferred compensation with the very first dollar of commissions they earn as a part of their compensation structure,” the complaint read. “Given that (advisors) are expected to generate revenue, their compensation for performing this core function—at the absolute minimum level—is not, and cannot, be a bonus.”
Needham underscored this point, expecting Merrill to try to “avoid liability” by arguing that the money was a bonus and thus not protected by ERISA.
“ERISA does, however, protect deferred compensation like the money that Mr. Milligan and others lost when they changed firms,” he said.
Bank of America Merrill Lynch did not respond to comment prior to publication.
Attorneys from several firms, including Motley Rice, Ajaimie LLP and Izzard, Kindall & Raabe, represent Milligan. However, other firms are also sniffing around; last week, securities law firm KlaymanToskes urged Merrill brokers with damages exceeding $100,000 to “explore all their legal options."
