Multiple employer plans – fiduciary litigation risk — Khan v. Pentegra

We consider briefly the treatment in Khan v. Pentegra of two issues: (1) who is the responsible fiduciary? and (2) for fee comparison purposes, what plans are comparable to a MEP?

In our last article we discussed certain issues that, in multiple employer plan fiduciary litigation, might be the same as, and other issues that might be different from, those in single employer plan fiduciary litigation. In this article we discuss how two of those issues are playing out in a recently filed case – Khan v. Pentegra.

In Khan, as in other 401(k) fiduciary litigation, plaintiffs focus on plan fees – in Khan, recordkeeping fees in particular (although there is also a by-now standard challenge to the plan’s investment management fees). And the suit is brought by the same law firm – Schlichter Bogard & Denton LLP – that has brought most of the high profile 401(k) fee litigation.

But unlike typical 401(k) fiduciary litigation, Khan is a suit against the multiple employer plan provider (Pentegra), not against the plan’s adopting employers, and there is an issue about the comparability of the Pentegra (multiple employer plan) fees to single employer plan fees.

In what follows we consider briefly the treatment in Khan v. Pentegra of these two issues: (1) who is the responsible fiduciary? and (2) for fee comparison purposes, what plans are comparable to a MEP?


Khan v. Pentegra, filed in the District Court for the Southern District of New York in September 2020, involves a group of plaintiff participants in the Pentegra Defined Contribution Plan for Financial Institutions. Note that this is a “pre-SECURE,” “closed MEP” maintained (according to the plan) for a group of employers (financial institutions) that have a “commonality of interest.”

Defendants in this litigation include the Board of Directors of the Plan and the plan’s provider, Pentegra Services, Inc.

The Pentegra plaintiffs claim that Pentegra is an ERISA fiduciary and that it breached ERISA’s fiduciary rules by causing the plan to pay it (Pentegra) non-competitive/excessive fees for recordkeeping and administrative services and to select for the plan’s investment lineup “higher-cost share classes instead of the identical lower-cost share classes that were available to the Plan.” Similar claims were made against the Plan’s governing board.

Is Pentegra a fiduciary (or, who do you sue)?

In the Pentegra litigation, the main litigation targets are Pentegra and the Plan’s governing Board, which is composed of representatives of participating employers.

A significant thrust of Pentegra’s defense (in its motion to dismiss) on the key issue of fiduciary responsibility is that – for the purpose of determining its fees (e.g., for recordkeeping and administrative services) – the Plan’s Board, and not Pentegra, is the responsible fiduciary. Quoting plaintiffs complaint, it was the Board that “exercised discretionary authority or discretionary control respecting the management of the Plan.”

The Plan’s Board – made up of officials of what one assumes are relatively small employers – may not have very deep pockets and therefore may not be an ideal plaintiffs litigation target.

We will have to see whether plaintiffs can successfully argue that, notwithstanding, e.g., a formal allocation to the Board of fiduciary responsibility for retention of Pentegra, Pentegra – as the plan’s primary provider (the plan is, after all, called the Pentegra Defined Contribution Plan for Financial Institutions) – functionally controls the plan.

Administrative fees and the issue of comparability

The Pentegra plaintiffs bring fee claims that are very similar to those made in other 401(k) fiduciary litigation, e.g., comparing the Pentegra plan’s recordkeeping fees with those of Nike’s plan, an allegedly “comparable large corporate 401(k) plan.” 

In addition to disputing plaintiffs’ facts, defendants challenge plaintiffs on the issue of comparability: “Apples-to-oranges comparisons to dissimilar benefit plans cannot state a breach of prudence claim.”

What are MEP economies of scale?

As in typical 401(k) fiduciary litigation, the Pentegra plaintiffs claim that, because of economies of scale – in 2018 the Plan had 27,227 participants and $2.1 billion in assets – the Plan should have been able to get “very low recordkeeping and administrative fees.” In our introductory article to these issues we noted that economies of scale for MEPs may be different than they are for single employer plans.

In this regard, the plaintiffs’ complaint argues:

“Grouping small employers together into a MEP” … can “facilitate savings through administrative efficiencies” and “price negotiation.” MEPs such as this achieve economies of scale of large plans that provide a “distinct economic advantage[]” of lower administrative costs for individual employers. MEPs create cost efficiencies in at least two ways: “First, as scale increases, marginal costs for MEPs . . . diminish and MEPs . . . spread fixed costs over a larger pool of member employers and employee participants, creating direct economic efficiencies. Second, larger scale may increase the negotiating power of MEPs.” Therefore, MEPs operating as a large single plan can secure low-cost administrative services from service providers. [Quotations are from the preamble to DOL’s 2019 MEP regulation.]

In its April 1, 2021, motion to dismiss, Pentegra directly challenges this argument:

Although a key benefit of a MEP is the possibility of gaining some economy of scale as compared to that achieved by each individual employer, a MEP does not enjoy the same economy of scale as a single-employer plan with the same amount of assets. For example, plans must pass annual tests to confirm they do not disproportionately benefit highly compensated employees or exceed IRS contribution limits.  Single-employer plans must conduct these yearly tests just once. MEPs, on the other hand, must conduct a test for each adopting employer. That is one reason why “the scale efficiencies of MEPs catering to small businesses [is] still likely be smaller than the scale efficiencies enjoyed by very large single-employer plans.” [Quoting the same preamble to DOL’s 2019 MEP regulation, with emphasis added.]

For fiduciary litigation, the issue of MEP efficiency goes to proof. The plaintiffs lawyers’ formula for showing in a given case that, e.g., a plan’s recordkeeping fees are “excessive” is to compare the per capita cost of recordkeeping fees for the target plan to some other allegedly comparable plan. That’s a pretty simple exercise. Having to figure out the correct metric for different MEPs, each with different employer demographics, may slow plaintiffs lawyers down in this sort of litigation.

Again, it will be interesting to see how this issue is developed by plaintiffs and defendants.

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The Khan v. Pentegra litigation also involves (now familiar) plaintiffs allegations about the imprudence of active management and a comparison fees and performance (retrospectively) for a number of plan funds vs. available “identical” or at least similar alternatives. These follow the typical pattern of 401(k) fee litigation.

We will continue to follow this and other MEP litigation, as it develops.