I will cheerfully admit to not being the sharpest knife in the drawer even after 35 years in the industry and 19 years of running my 401k practice. The Amazon 401k forfeiture lawsuit is certainly a head scratcher.
When I hear 401k forfeiture, I immediately think about an employer match and/ or profit sharing contribution with a vesting schedule. The forfeiture comes about when an employee leaves and is not fully vested in the match and/ or profit sharing. The unvested amount is referred to as the forfeiture.
When I read forfeiture account mismanagement in a 401k context, my mind leaps to a plan document question. Does the 401k plan document state how forfeitures may be used? Most plan documents that I have seen (as well as the IRS reg, REG-122286-18) states that forfeitures in a plan may be used to (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants’ accounts in accordance with plan terms.
A 401(k) plan can be accused of mismanaging forfeiture funds even if the plan document outlines their use, typically due to one or more of the following issues:
Failure to Follow the Document: If the plan fiduciaries do not apply forfeitures according to the terms of the plan—e.g., using them for employer contributions, administrative expenses, or reallocation—they are in breach of fiduciary duty.
Delayed Use of Forfeitures: The DOL and IRS expect timely usage of forfeitures, usually within the plan year. Accusations may arise if forfeitures accumulate over multiple years without being used.
Inadequate Documentation or Oversight: Even if the plan uses the funds appropriately, poor recordkeeping or lack of a clear audit trail can lead to claims of mismanagement.
Improper Use for Plan Expenses: If forfeitures are used to pay plan expenses that are not permissible under the plan document or ERISA (e.g., settlor expenses), this could trigger a fiduciary violation.
Adherence to the plan document alone is a must along with execution, timing, and documentation. The need for documentation is addressed in Tax Reform Act, Section 6001. Regular review and oversight are critical.
So what then is possibly being said in the Amazon lawsuit, Curtis v. Amazon.com? Curtis seems to be saying that Amazon misappropriated millions of dollars in forfeited 401(k) assets between 2018 and 2023. His complaint argues instead of using the funds to offset administrative expenses—such as record keeping fees, investment management fees, and transaction fees—or redistributing them to eligible participants, Amazon applied them toward its future employer contributions, effectively saving the company millions.
But isn't this doing what the plan document says Amazon could do? His lawsuit states that the plan agreement permits fiduciaries to utilize forfeited funds in the three ways I mentioned above - restore forfeited accounts (ie, put the forfeited money into existing participants' 401k accounts on a pro-rata basis), pay administrative cost, and/ or lower future matching payments. Is the issue then that Amazon chose to do something that benefited itself as it is allowed to do under the plan agreement?
The Parting Glass
While legal and industry experts have expressed skepticism about the lawsuit’s merits, I am neither an attorney or a recognized industry expert. I am a simple 401k advisor scratching my head.
Perhaps what will be needed is a court ruling that clearly states what order forfeiture funds may be used in? Companies/ non-profits would likely have one view on that based on cashflow and employees would possibly have a different view based on a desire to retire with dignity.