An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against Pentegra Retirement Services and the Board of Directors of the Pentegra Defined Contribution (DC) Plan, multiple employer plan (MEP) for financial institutions, alleging the plan fiduciaries failed to ensure reasonable fees for plan participants and engaged in self-dealing.

The complaint accuses Pentegra of using the plan to generate “greatly excessive administration fees, to benefit itself.” It alleges that in 2010, plan assets were used to make a $7,370 payment to the Ritz Carlton Naples and a $5,015 payment to the New York Palace Hotel “presumably for defendants’ personal benefit.”

After a discussion of how large plans can negotiate lower fees than small plans and how fixed per-participant fees allocated pro-rata by participant account balance is what “a prudent fiduciary would” do, the complaint states, “The plan paid Pentegra millions of dollars each year in excessive fees for recordkeeping and administrative services, from at least 2014 until 2018.” The lawsuit says the plan’s Forms 5500 show that in 2014, when the plan had 26,469 participants, it paid Pentegra at least $9.52 million in direct recordkeeping and administration fees, or an average of $359.70 per participant. By 2018, the plan had grown to 27,227 participants, and Pentegra’s fees had grown to $10.58 million, or $388.77 per participant. “Indeed, Pentegra’s fees rose every year over a decade, during a time when the retirement plan administration industry generally saw declining fees, and despite the fact that Pentegra’s services have remained the same throughout that time period,” the complaint states.

The plaintiffs compared the Pentegra MEP to Nike’s 401(k) plan, which they said with approximately 19,000 to 26,000 participants, paid $21 per participant for recordkeeping services in 2012 and 2016. The complaint listed several other examples of plan for which recordkeeping expenses were between $14 and $31 per participant. Comparing Pentegra’s plan to another large MEP, the complaint notes that the other plan uses an outside recordkeeper and paid an average of $80 per participant. “Pentegra’s 2018 average per participant fee of approximately $388 for similar ‘contract administrator’ services was 485% higher,” the complaint states.

Pentegra is accused of failing to regularly monitor administrative fees or to regularly solicit competitive bids from third-party providers to keep fees in check. The lawsuit also said Pentegra failed to monitor total compensation from all sources.

Prohibited Transactions

The complaint moved on to say that Pentegra, as a plan fiduciary, caused the plan to retain Pentegra as recordkeeper and “contract administrator,” to use Pentegra collective investment trusts, and to pay plan assets to Pentegra. Pentegra dealt with the assets of the plan in its own interest or for its own account; acted in a transaction involving the plan on behalf of a party whose interests were adverse to the interests of the plan, its participants and beneficiaries; and received consideration for its own personal account from parties dealing with the plan in connection with transactions involving the assets of the plan, all in violation of ERISA Section 1106(b)(3), the complaint says.

“In light of the excessive fees and increasing amounts paid while services remained constant, the continued retention of Pentegra as the plan’s administrator, and the board’s apparent failure to solicit bids from recordkeepers, providers of contract administrator, or 3(16) services, it is evident that Pentegra through its employees, controlled the decisions of the board, causing it to favor Pentegra,” the plaintiffs allege.

The complaint says that from 2014 to 2018, the defendants caused more than $50 million in direct payments to be taken from the plan and paid to Pentegra.

It also states that the “defendants failed to engage an independent fiduciary to determine whether it was in the interest of plan participants to engage in this scheme or whether the services the Pentegra employees performed were necessary for the operation of the plan, whether the amounts charged for those services were reasonable, and whether Pentegra was paid only its direct expenses incurred in providing necessary services to the plan.”

Excessive Fees for Investments

The lawsuit claims that since the plan is considered a “mega” plan based on its assets, it had “tremendous” bargaining power to obtain low fees for investments and investment management. It says that the defendants selected and continue to retain higher-cost share classes for the plan investment options than were available to the plan based on its size, including lower cost share classes of otherwise identical mutual funds, separately managed accounts (SMAs), and/or collective investment trusts (CITs).

“By providing plan participants the more expensive share classes of plan investment alternatives, the defendants caused participants to lose over $37 million in retirement savings,” the complaint alleges.

Robert D. Alin, first senior vice president and general counsel said: “To date, we have not been served but are aware of the complaint. We reject the claims and intend to mount a vigorous defense against them. In fact, Pentegra is looking forward to strongly defending this lawsuit and standing up for the valuable services we provide to participating employers and their employees.”