A federal judge recently dismissed a new lawsuit challenging the use of forfeited 401(k) funds in a plan sponsored by WPP Group USA, Inc..
Key facts & legal reasoning
- The plaintiffs argued that the plan broke its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by using forfeitures to offset future employer contributions instead of covering administrative costs.
- The court — John G. Koeltl — granted the defendants’ motion to dismiss, finding that the plan document gave the sponsor/committee discretion over how to apply forfeitures, and that using them to offset employer contributions is not a breach of duty.
- The court emphasized that ERISA’s fiduciary duties are satisfied so long as the plan provides participants’ promised benefits — which it did here — and that the plaintiffs were effectively seeking an extra benefit (administrative-cost coverage) not guaranteed by the plan document.
- The judge also observed that decades of regulatory and agency guidance support the use of forfeitures in this manner — including a recent amicus brief from the U.S. Department of Labor (DOL) in a related forfeiture case.
What this means for plan sponsors
- This decision strengthens the trend in similar forfeiture-litigation cases: courts are consistently siding with plan sponsors when the plan document allows flexibility in forfeiture allocation.
- As long as your plan document provides discretionary allocation of forfeitures (e.g., to reduce employer contributions or cover expenses), using forfeitures to reduce employer contributions appears legally defensible.
- That said, court decisions remain somewhat fact-specific. Particularly relevant are the precise plan-document language and whether participants received all benefits promised.
Advisory recommendation: what you should do now
- Review your plan document — Ensure that the sections governing forfeitures clearly articulate the sponsor’s discretion in how forfeitures are allocated (e.g., employer contribution offsets, administrative expenses, etc.).
- Document your forfeiture use — Maintain clear records showing how forfeited funds are applied. Doing so strengthens defense should litigation arise.
- Monitor ongoing precedent — While recent rulings are favorable to sponsors, not all cases are identical; remain alert for future developments, especially at the appellate level.
- Communicate with plan stakeholders — Consider briefing your HR team or committee about the current legal environment to reaffirm that your approach is consistent with sound risk-management practices.
The Parting Glass
This decision is a practical win for plan sponsors — it reinforces the long-standing principle that forfeitures need not automatically be used to reduce participants’ plan costs. As an advisor, I view it as a strong argument for preserving discretionary forfeiture allocation, provided your plan documents support it.