The 20-year-old midfielder suffered from a number of off-field problems during his time at Old Trafford after joining the Red Devils as a teenager in 2009.
Morrison, who now appears to be enjoying some stability in his career at Upton Park, received plenty of praise on Sunday when he scored an impressive solo goal in West Ham's 3-0 win over Tottenham Hotspur.
"He needed to get out of Manchester," Phelan told BBC Sport. "He has gone away from the club now, which I think in hindsight is the correct thing to have done."
Morrison spent last season on loan at Championship club Birmingham City.