Dismissal Rulings Expected Soon in Multiple 401(k) Forfeiture Proposed Class Action Lawsuits

At least nine pending proposed class action lawsuits challenging how companies use 401(k) forfeitures are facing rulings on motions to dismiss in the coming weeks. 401(k) forfeitures occur when a worker leaves their employment before the employer’s matching contributions are fully vested. The 401(k) plan participants in these suits claim that their employers misused forfeited funds by reducing their expenses on required contributions to employee accounts rather than contributing the funds toward lowering plan fees for participants. The participants allege that the employers’ use of funds in this manner constitutes a breach of their fiduciary duty under the Employee Retirement Income Security Act (ERISA) by choosing their interests over those of their employees.

The pending cases include those involving large companies such as Mattel, Honeywell, Clorox, Intuit, and HP. A single law firm, Hayes Pawlenko LLP, has filed most of the cases, now pending in California federal district courts. These claims originated from a 2017 U.S. Department of Labor (DOL) lawsuit against technology company Sypris Solutions Inc., in which the DOL alleged that Sypris violated ERISA for failing to follow plan documents concerning the use of forfeited 401(k) funds to lower plan expenses before using them to reduce employer contributions. In 2023, a Kentucky District Court judge approved a consent agreement that required Sypris to reimburse $575,000 to plan participants and pay $57,500 in penalties to the DOL.

However, in many of the pending cases, the plan documents explicitly permit the companies to use forfeited funds to reduce their contributions to employee accounts. As a result, the companies have filed motions to dismiss the claims, arguing that the plan participants cannot sustain their breach of fiduciary duty lawsuits when their use of the forfeited funds is specifically permissible under the plans. The companies also point out that the Internal Revenue Service (IRS) and both existing and proposed Department of Treasury regulations fully support companies’ usage of forfeited 401(k) funds in this manner.

Another issue is whether the plan sponsor’s usage of forfeited funds falls within the purview of a fiduciary duty under ERISA. For instance, Clorox argued in its recent motion to dismiss that using the forfeited 401(k) funds was acting in its capacity as a settlor, not a fiduciary. So-called “settlor” activities do not fall within ERISA’s breach of fiduciary duty language and, therefore, cannot form the basis for a breach of fiduciary duty claim. However, plan participants counter that when plan sponsors choose to utilize forfeited 401(k) funds to decrease their contributions instead of decreasing plan costs for participants, they are violating their duty of loyalty by prioritizing their interests over plan participants’.

Some parties await the outcome of hearings on motions to dismiss by the defendant companies. Still, others are waiting for hearings on their motions to dismiss to be scheduled. In every case, benefits litigators are closely watching the outcomes of these and similar cases for trends and opportunities for future litigation.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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