Employer considerations following wave of 401(k) forfeiture lawsuits

Over the past year, numerous employers and their 401(k) plan fiduciaries have faced lawsuits regarding how forfeited employer contributions to their 401(k) plan are utilized. This wave of lawsuits began approximately a year ago when a law firm filed putative class action lawsuits raising this novel claim against multiple large employers—including Intuit, Clorox, and Thermo Fisher Scientific—in California federal courts. Since then, the claim has been included in numerous 401(k) plan lawsuits even though none of them has reached a final judgment on the merits, and only four have had decisions on motions to dismiss.

Lawsuits become problematic

The lawsuits allege the employer and its 401(k) plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by using forfeited employer contributions to the 401(k) plan to offset future employer contributions instead of using the forfeited amounts to offset 401(k) plan expenses that were charged to participant accounts. The employees’ counsel alleges the employer and 401(k) plan fiduciaries are violating ERISA’s fiduciary requirements to make decisions for the benefit of plan participant because the employer benefits from a reduction in its future contributions at the expense of plan participants who have to pay for certain expenses that are charged to their 401(k) accounts.