A New York federal jury this week awarded $38.7 million in damages to a class of 401(k) plan participants alleging a fiduciary breach against Pentegra’s $2B+ multiple employer plan—an amount believed to be the highest jury verdict ever in an excessive fee case.
National plaintiffs law firm Schlichter Bogard announced the verdict against Pentegra Services Inc. and members of its Board of Directors for breach of fiduciary duty for self-dealing that resulted in excessive fees in a press release Thursday. The unanimous verdict, delivered on April 23, followed a one-week trial before U.S. District Judge Philip M. Halpern.
“We believe this to be the highest jury verdict ever in an excessive fee case and are very pleased with the jury’s understanding of the serious duty that Pentegra and its Board owed to employees and retirees and that justice was served,” said Troy Doles, who along with Nathan Stump, led the Schlichter Bogard trial team in the case. “Employees deserve the right to build their retirement assets for a secure retirement without Pentegra acting for its self-interest against them.”
The plaintiffs alleged that Pentegra violated its fiduciary duty to the plan participants through a conflicted structure in which members of its Board of Directors served on the 401(k) plan’s fiduciary committee, with a duty to make sure fees were reasonable, while at the same time working to maximize profits for the company, and against the interest of employees and retirees. Pentegra Services Inc. and its Board of Directors denied the conflict of interest, and contended the fees charged employees and retirees were reasonable.
The case, Khan et al. v. Board of Directors of Pentegra Defined Contribution Plan et al., was originally filed in the Southern District of New York in 2020, claiming Pentegra engaged in self-dealing and charged excessive fees in a $2.1 billion multiple employer plan (MEP) it administers for more than 27,000 employees at nearly 250 financial institutions. The case survived the motion to dismiss stage in March 2022, and in October 2023 secured a jury trial and class certification.
“Instead of using the Plan’s bargaining power to benefit participants and beneficiaries, Defendants acted to enrich themselves, including Pentegra, by allowing exorbitantly unreasonable expenses to be charged to participants for administration of the Plan,” the original lawsuit stated.
The Pentegra Defendants, the suit contends, filled the plan with overly expensive mutual funds and used plan assets for improper purposes like luxury hotel charges.
As of Dec. 31, 2018, the Plan included more than 27,000 participants and $2.1 billion in assets, placing it among the largest 0.07% of all defined contribution plans in the U.S. based on plan assets. The Plan’s massive size, the suit stated, gave it enormous bargaining power to command very low administrative fees for its participants.
“The Board failed to monitor and control recordkeeping and administration fees collected from Plan assets by Pentegra, which skyrocketed at the same time that fees were declining industrywide,” the suit stated.
According to a pre-trial order from Halpern, the case is being tried in two distinct phases. While Wednesday’s verdict decided phase one, the second phase, accusing Pentegra of committing prohibited transactions by causing the plan to retain Pentegra Services Inc. (PSI) and pay it using plan assets, will be decided in a bench trial, with no jury present.
Plaintiffs are seeking up to $157 million in recovery in phase two, as well as equitable relief related to the future management and governance of the plan. The court set a deadline of May 2 for the filing of additional party information relevant to phase two, signaling continued movement in what could be a landmark ERISA fiduciary case.
SEE ALSO:
Schlichter Targets Pentegra MEP in Latest Excessive 401k Fee Lawsuit
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.