Khan v. Board of Directors of Pentegra Defined Contribution Plan

Background

Imran Khan, Joan Bullock, and Pamela Joy Wood brought a proposed class action against the Board of Directors of the Pentegra Defined Contribution Plan, Pentegra Services, Inc. (PSI), and individual defendants. The plaintiffs are participants in the Plan, a multiple-employer defined-contribution employee-benefit plan. They alleged that the defendants were plan fiduciaries and that PSI provided recordkeeping and administrative services while receiving excessive compensation.

The plaintiffs alleged that PSI received more than $50 million in Plan assets since 2014 through asset-based fees and other charges. They alleged that the defendants repeatedly renewed PSI’s contract without competitive bidding, failed to negotiate lower fees or a plan-level cap, and failed to determine whether PSI’s compensation reflected its actual costs or market rates. They also alleged that the defendants offered higher-cost versions of investment options when lower-cost institutional versions were available, causing participants to lose retirement savings.

The amended complaint asserted four claims under the Employee Retirement Income Security Act (ERISA): breach of the duty of prudence concerning recordkeeping and administrative fees; prohibited transactions; breach of the duty of prudence concerning investment-management fees; and breach of the duty to monitor appointed fiduciaries. The first and third claims also included theories based on the duty of loyalty. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Rulings on PSI’s Fiduciary Status

The court declined to rule at the pleading stage that PSI was not an ERISA fiduciary. ERISA defines a fiduciary functionally, based on the person’s authority or control over plan management, assets, or administration. The plaintiffs alleged that PSI performed broad fiduciary functions, that PSI had a prior relationship with the Plan, that John E. Pinto was both a Board member and PSI’s president and chief executive officer, and that PSI’s contract was renewed without competitive bidding. Accepting the well-pleaded allegations as true and declining to resolve factual disputes, the court held that the allegations were sufficient to allow the issue to proceed into discovery.

Duty-of-Prudence Claims

The court held that the plaintiffs plausibly alleged that the defendants breached ERISA’s duty of prudence regarding recordkeeping and administrative fees. The complaint identified fee comparisons involving other plans, including another multiple-employer plan, and alleged specific information about services, participant numbers, and fees. The court concluded that deciding whether the plans were meaningful comparators would require resolving factual issues not appropriate on a motion to dismiss.

The court also found plausible allegations that the defendants failed to monitor PSI’s asset-based charges, failed to solicit competitive bids, and failed to use the Plan’s size to negotiate lower fees. Those allegations were sufficient to support the first claim to the extent it rested on the duty of prudence.

As to investment-management fees, the plaintiffs alleged that approximately thirty Plan investment options used higher-cost versions even though lower-cost institutional versions were available. The court held that these allegations plausibly suggested that the defendants failed to investigate and obtain lower-cost shares. The motion to dismiss the third claim was therefore denied to the extent that claim alleged a breach of the duty of prudence.

Duty of Loyalty

The court granted the motion to dismiss the loyalty theories in the first and third claims. The plaintiffs relied on the alleged failure to monitor and negotiate PSI’s fees, repeated contract renewals without competition, Pinto’s relationship with PSI, and certain hotel and Board-related expenses. The court held that these allegations did not plausibly show that a defendant acted against Plan participants while performing a fiduciary function or that the defendants favored themselves or a third party at the Plan’s expense.

The court also concluded that the loyalty theories largely repackaged the prudence allegations as disloyal conduct. It therefore held that the first and third claims were dismissed only insofar as they alleged breaches of the duty of loyalty.

Prohibited-Transactions Claim

The court declined to dismiss the second claim. The plaintiffs plausibly alleged that PSI was a party in interest under ERISA and that it received payments exceeding reasonable compensation for services to the Plan. The court also rejected the argument that the claim failed because PSI was not a fiduciary, because the court had not ruled at this stage that PSI lacked fiduciary status. The allegations that PSI’s fees were significantly higher than prevailing market rates also supported the portions of the claim concerning transactions involving a fiduciary.

Duty-to-Monitor Claim

The court denied the motion to dismiss the fourth claim against the Board of Directors and its individual members. The plaintiffs alleged that these defendants failed to monitor their appointees and delegates, failed to evaluate their performance, failed to establish monitoring systems, and failed to remove fiduciaries whose performance was inadequate. Because the court found that the plaintiffs plausibly alleged an underlying breach of the duty of prudence, and because the precise monitoring procedures depended on facts about the Plan, the claim could proceed.

Disposition

The court granted in part Defendants’ motion to dismiss. The first and third claims were dismissed only to the extent they alleged breaches of the duty of loyalty. The claims alleging breaches of the duty of prudence, prohibited transactions, and breach of the duty to monitor remained pending. The parties were directed to proceed with discovery under the established schedule.