Since late 2023, over 30 ERISA class action lawsuits have been filed challenging the use of 401(k)
As I have said before, I am not a legal expert but I would like to think I have learned a little something over 35 years in the industry. I remember the first time my mom asked if I wanted coffee or tea (and a Happy Mother's Day to all the mothers out there!). She knew I sometimes wanted one or the other. That is the very meaning of "or". It implies choice. And it does not mean that if I prefer one drink in a given moment, I am forever stuck with that choice.
I was reviewing the Basic Plan Document on roughly 75% of my plans and the word, "OR" is right there in the forfeiture section. A plan may use unvested employer contributions to pay for plan expenses or reduce future employer contributions or be paid out pro-rata to 401k participant accounts.
The flurry of lawsuits seem to express a preference (naturally) that unvested money go to the remaining participants. This makes sense in that the other participants might have to work hard to pick up the slack by the departed participant but the word, "OR" implies choice.
Key Legal Developments
Motions to Dismiss: Courts have issued mixed rulings. Some have allowed cases to proceed, finding plausible allegations of fiduciary breaches when plans permitted discretion in using forfeitures. Others have dismissed cases, especially where plan documents explicitly allowed using forfeitures to reduce employer contributions.
Settlements: Notably, John Muir Health settled a lawsuit alleging ERISA violations related to high fees and mishandling of forfeited funds.
Implications for Plan Sponsors
Given the evolving legal landscape, it's prudent for plan sponsors to:
Review Plan Documents: Ensure clear provisions regarding the use of forfeitures, aligning with current practices. Read your Basic Plan Document!
Assess Fiduciary Practices: Evaluate whether the use of forfeitures aligns with fiduciary duties under ERISA. And at the same time, seek your own ERISA counsel. I am of the view that "OR" allows choice.
Monitor Legal Developments: Stay informed about ongoing litigation and regulatory guidance to adapt practices accordingly. I think this is key while acknowledging that in the current moment, the Courts have provided a murky crystal ball.
The Parting Glass
While the IRS permits using forfeitures to offset employer contributions, courts are scrutinizing the fiduciary implications.Plan sponsors should proactively address these concerns to mitigate litigation risks. Speaking of that, I will tuck back into the Knight - Swift Transportation Holdings forfeiture case now.