The Red Devils have already fallen 16 points off the pace in the Premier League this season and currently occupy sixth place, with only seven wins to their name.
A trip to Anfield on Sunday beckons and defeat could spell the end of United's top-four chances, with Chelsea already eight points in front in the final Champions League position.
Speaking ahead of the weekend's huge clash, Phelan, who worked as Ferguson's assistant manager during his last five years at the helm, believes the club is in a state of flux.
"They haven't improved, it's as simple as that," he told Sky Sports News.
"They haven't grasped the mantle and moved forward. They're still lagging behind and a lot of teams have caught them up.
"I think their selection of players and the direction they're going in has proved difficult for Manchester United. Others have overtaken them in that respect."
Mourinho's two and a half year spell at Old Trafford to date has yielded Europe League and Carabao Cup winner's medals, but in the Premier League, he has struggled to get to grips with local rivals Manchester City.
United finished 19 points behind Pep Guardiola's men in second last term and have faded into anonymity this year, while the likes of Liverpool, Chelsea, Spurs and Arsenal have all seemingly improved.
Phelan puts that decline down to a 'lack of investment' from the club and suggests that they face many more years of hurt if money is not spent wisely in the future, while also referencing Liverpool's struggles over the last 20 years.
"There's no shortage of investment into Manchester United," he added. "I think most people realistically could say the money is there to spend, but it's who you spend it on and what you are getting for the money.
"Decision making is always top of the tree when it comes to the big football clubs and where it takes you. Is it going to be a year, is it going to be two years, is it going to be three?
"It's progressing into five, six, maybe even seven. It's going in the direction that Liverpool went in years ago."