Participants in the Pentegra Defined Contribution Plan for Financial Institutions (Pentegra Plan) accused Plan fiduciaries of misusing their retirement savings to support Pentegra Services, Inc. (PSI), which provided recordkeeping services. This, they argued, violated the fiduciaries’ duty to the participants and beneficiaries of loyalty and prudent financial management. In addition, the transfer of funds to an affiliate constituted a “prohibited transaction” under ERISA.
Count I – sky high fees
In a defined contribution plan, administrative costs are deducted directly from participant accounts. The higher the fees paid to PSI, the less money participants would have for retirement.
Plan participants claimed that, in 2018, roughly a year before the ERISA lawsuit was filed, the Pentegra Plan paid PSI $10.58 million in direct recordkeeping and administration fees, or an average of $388.77 per participant. PSI’s fees had risen every year over a decade, at a time when the retirement plan administration industry generally saw declining fees. By comparison, the lawsuit alleges that fees paid by comparable plans ranged from $21 to $33 per participant.
The Pentegra Plan is a very large multiple-employer plan, with 27,227 participants and $2.1 billion in assets as of the end of 2018. The Complaint alleged that rather than “using the Plan’s bargaining power to benefit participants and beneficiaries,” [d]efendants acted to enrich themselves … by allowing exorbitantly unreasonable expenses to be charged to participants for administration.” The Pentegra Plan, they claim, should have been able to negotiate lower fees, as many very large plans do.
The lawsuit also alleged that the defendants profited from collecting additional fees directly from employers who participate in the Plan — putatively to pay for “outsourced” fiduciary responsibility. This, the participants argued, was also directly contrary to their assumed fiduciary responsibility because their actions drained the retirement assets of Plan participants to benefit themselves.
Duties of loyalty and prudence
Section 404 of ERISA requires fiduciaries to discharge their duties with respect to the plan solely in the interests of the participants and beneficiaries with care, skill, prudence, and diligence. The original jury award of $38.7 million in Kahn focused only on the evidence presented at trial that the fees violated this section of the law. Following the jury verdict on Count I, the participants sought an additional $157 million on the prohibited transaction charge.
Count II – much too cozy a relationship
One hand appears to have washed the other in this cozy arrangement. The Pentegra Plan was PSI’s second largest client. PSI had helped to pick the Pentegra Plan’s management committee. Pentegra President and CEO John Pinto was a non-voting board member of the Plan and was also the president of PSI. The Pentegra Plan’s management committee never conducted a Request for Proposal (RFP) process that would have enabled them to assess whether fees charged by PSI were reasonable and to seek competing bids for the services rendered.
Avoiding conflicts of interest
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Sections 406 and 407 of ERISA restrict certain transactions between a retirement plan and parties related to the plan. These rules aim to prevent conflicts of interest and protect plan assets by barring transactions like sales, loans, and the provision of other services between the plan and these related parties. For a prohibited transaction charge, ERISA does not necessarily require evidence about whether participants were financially harmed. It is generally necessary only to show that the parties were related and that the transaction occurred. The cozy relationship between the Pentegra Plan and PSI appears to have been enough to support a prohibited transaction charge.
More than just money
Under the settlement agreement, members of the Pentegra Plan’s board who participated in the offending transactions will be replaced to ensure that there will be no overlapping membership of the PSI and Plan boards. In addition, the Plan must conduct an RFP for recordkeeping, administrative, and fiduciary services currently provided by PSI.
Although the total funds provided to participants under the combined jury award and settlement is far less than they sought, the additional provisions of the settlement seem designed to allow the Pentegra Plan to go forward with a clean slate.
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