Those of you who know me know that I tell my family I do not want Christmas gifts. It is not that I am against Christmas but part of it is I am older and have too much stuff. I also don’t want birthday gifts, Valentine’s Day gifts, anniversary items, and nothing for Father’s Day. Now before you think that I am an absolute curmudgeon, I tell my family that what I want is to go to Burning Man. Save the money and let me spend it on Burning Man.
The annual Burning Man gathering is held in late August to early September and takes me out of the office for five business days. During that time, I have no cell reception, no Internet, and in fact, am cut off from the outside world. This is my yearly opportunity to decompress and that is worth more than a gift.
But as I read the latest 401k forfeiture lawsuit, maybe what I would like for Christmas is a clear court ruling for small 401k plans regarding forfeitures. My company advises roughly 100 small plans across the US. When small retirement plans are set up, they are typically done so via a prototype plan document. The plan sponsor may elect certain provisions (ie, will the plan offers loans or not) but by and large, the plan document consist of boiler plate language that cannot be altered.
This language includes how forfeitures should be used. Typically a small 401k plan document will state the allowed three uses - offset employer plan expenses, offset employer contributions, or dispersal to existing employee retirement accounts. The Document typically does not rank-order these choices or say which one the employer must follow first. That choice is left to the employer.
Having said that, I suspect we will continue to see forfeiture litigation at the mega-plan level as it is “profitable”. I can only wish for (for Christmas, perhaps) for legal clarity once and for all on this topic.
In the most recent case, a federal judge in the Western District of Michigan dismissed the ERISA fiduciary breach lawsuit against Meijer alleging improper use of 401(k) forfeitures (Donelson v. Meijer). The plaintiffs claimed that Meijer violated fiduciary duties by using forfeited funds to reduce employer contribution obligations instead of using those funds to defray administrative expenses or directly benefit participants. They also alleged prohibited transactions, delay in using forfeitures, and failure to monitor fiduciaries. The court granted the motion to dismiss for failure to state a claim.
Key judicial holdings:
- Plan language followed: The plan expressly allowed forfeitures to be used to reduce employer contributions or pay administrative costs; Meijer’s practice complied with this design.
- ERISA fiduciary duties interpreted narrowly: The duty of loyalty and prudence was held to require only that plan benefits promised in the documents be delivered; discretionary use of forfeitures consistent with plan terms does not inure to employer beyond what the plan permits.
- Prohibited transaction claim rejected: Transferring forfeitures to offset employer contributions was not deemed a prohibited transaction when the plan could achieve the same result by amendment.
- Delay arguments failed: The mere presence of forfeiture balances at year-end did not plausibly show unreasonable delay or ERISA violation.
- Monitoring claim collapses: Without an underlying fiduciary breach, there was no failure to monitor.
Differences from Prior Forfeiture Cases
While this decision aligns with a growing majority of dismissals, there are nuanced distinctions compared with other cases:
- Plan language specificity:
In some earlier suits (e.g., Intuit), plaintiffs succeeded past motion to dismiss by showing the fiduciaries did not follow explicit plan terms. Here, the plan clearly authorized the contested use of forfeitures. - Prospective application:
The court emphasized that Meijer’s decision was prospective and did not affect already vested or allocated benefits—drawing a sharper line than some suits where alleged past wrongs affected participant accounts. - Treatment of prohibited transactions:
This opinion adopted the Sixth Circuit view that internal reallocations within the ambit of plan design aren’t prohibited transactions, a stronger rejection than some minority contrary analyses. - Use of IRS guidance:
The court noted that IRS guidance requires allocation by year-end but not immediate use, providing additional support for discretionary timing—a point often contested in prior litigation.
Plan Sponsor Action Items
1. Review and, if needed, clarify plan forfeiture provisions
Ensure the plan document unambiguously specifies how forfeitures may be applied (e.g., ordering of administrative costs vs. employer contribution offsets) to minimize interpretative risk.
2. Document fiduciary decisions and reasoning
Even when using discretionary language, maintain contemporaneous records demonstrating that fiduciary choices regarding forfeitures are grounded in the plan’s design and consistent with administrator intent.
3. Evaluate administrative timing practices
Consider adopting internal policies for the timely application of forfeitures to guard against claims of unreasonable delay, even if current practice technically complies with plan language.
4. Monitor IRS and DOL guidance and proposed rules
Ongoing regulatory evolution (e.g., proposed IRS rules on forfeiture timing) may affect interpretations of ERISA compliance standards.
5. Educate committees and advisors on litigation trends
Recognition that courts continue to dismiss forfeiture suits when plan terms authorize practices reinforces the importance of design clarity and governance diligence.
The Parting Glass
This decision underscores that when a plan’s terms expressly permit discretionary forfeiture use, courts are unlikely to find ERISA fiduciary breach merely because participants prefer allocations that benefit them more directly. Proper plan drafting and documentation remain the best defenses for plan sponsors.
Small plans with pre-approved template plan documents and little room to edit said documents will likely still see the same three forfeiture choices and discretion as to how forfeitures are applied. This will likely be the case until I get what I want for Christmas.