401(k) Forfeiture Claims Fuel Excessive Fee Suits They Follow

Employers handling 401(k) assets forfeited by former employees have been reckoning with suits that seek to combine emerging benefits law breach claims over their use of the funds to defray their contributions with long-popular excessive plan fee allegations.

Several judges have proven receptive to workers’ arguments that using their 401(k) forfeitures to reduce administrative expenses could be an Employee Retirement Income Security Act violation, after a California federal judge said Qualcomm Inc. workers plausibly alleged the company put its financial interest ahead of participants’.

Employees have alleged that other large companies like Wells Fargo & Co., Honeywell International Inc., Nordstrom Inc., and John Muir Health similarly mishandled 401(k) forfeitures.

Many preexisting 401(k) excessive fee suits are now seeking court approval to amend their complaints to tack on forfeiture-related claims. Their successful addition to many fee suits could help employees’ cases, especially following the judge’s decision to let the Qualcomm litigation proceed.

“The fact that the Qualcomm court said these are plausible allegations is a big win for the plaintiff’s bar,” said Eric Gregory, member at Dickinson Wright PLLC. “It gives them another arrow in their quiver to be able to say that there’s more damages that could be alleged here, and they can get a better settlement.”

Judge Roger T. Benitez of the US District Court for the Southern District of California on Aug. 12 denied Qualcomm a quick appeal of his ruling.

That same day, a former Intuit Inc. employee advanced her proposed class action when another California federal judge denied the employer’s bid to dismiss the case, ruling the company was acting as a fiduciary by exercising discretion over plan assets and potentially violating a plan term allowing forfeitures only to be used for certain contributions.

Tacking On Forfeiture Claims

Judges elsewhere are also seeing the viability of these fiduciary breach allegations, with a Kansas federal magistrate judge on Aug. 15 allowing participants to amend their complaint adding forfeiture-related claims to a 401(k) fee suit against plan sponsor Amentum Government Services Parent Holdings LLC.

“When these cases came out, it really caught me and the rest of the benefits attorney world off guard because we never would have imagined that this could be a breach of fiduciary duty, since the tax codes expressly authorized it,” Gregory said.

A 1963 Treasury regulation specifies that plan providers must use forfeited assets to reduce the employer’s contributions under the plan. An IRS proposal from February 2023 seeks to clarify that employers can also use forfeited assets for administrative expenses, to reduce employer contributions, or increase benefits in other participants’ accounts in accordance with the terms of the plan.

LifePoint Health Inc. was also hit with a lawsuit last week combining claims that it charged excessive 401(k) fees to participants with alleged breaches related to its handling of plan contributions forfeited by departing workers. LifePoint allegedly ran afoul of its duties under ERISA by using $4.4 million in forfeitures to reduce its typical match contributions to the plan.

The suits seem to be following the same pattern as the excessive fee 401(k) cases, and may help shore up other investment and recordkeeping claims, said René Thorne, principal at Jackson Lewis PC.

“They’ve obviously been able to overcome a motion to dismiss, and since that time we’ve seen several of the other frequent fliers for the plaintiffs bar starting to throw these claims into existing fee and expense cases, either by trying to amend them or by trying to backdoor it, asking information about forfeitures in discovery,” Thorne said.

Prolific excessive fee litigators Walcheske & Luzi LLC are among the firms representing plan participants in the Nordstrom and John Muir Health class actions, while Capozzi Adler PC entered the field of forfeiture litigation with the LifePoint Health suit.

“I don’t really think it’s going to bolster these excessive fee cases,” said José Jara, counsel at Fox Rothschild LLP. “But for those excessive cases that would have been thrown out, now they have a little bit of a glimpse at keeping the case alive.”

The lawsuits allege that employers run afoul of ERISA by exercising discretion over the forfeitures to benefit themselves over workers, but the question of whether unvested benefits count as plan assets under the statute remains unsettled.

Companies hoping to preempt potential litigation can, in certain cases, amend their plan documents to specifically remove the discretionary element from their allocation of forfeited benefits, specifying how the money must be used once an employee leaves them behind, benefits lawyers say.

“All the frequent fliers are now like, ‘these fee and expense cases didn’t work out,’ and they’re saying, ‘what’s the next best thing, we better jump ahead of everybody else,’” Thorne said. “So there’s going to be a scramble.”

DOL Guidance Lacking

Another decision in the wake of the Qualcomm ruling indicated differing interpretations among judges. HP Inc. successfully defeated class action claims June 17 after Judge Beth Labson Freeman of the US District Court for the Northern District of California said the tech company’s use of forfeitures falls squarely within the bounds of ERISA.

Disagreement among judges has done little to provide clarity on the lingering questions around plan forfeitures, as has the absence of updated Labor Department guidance.

“I wish the DOL would come out and, whether issuing formal guidance or even informal guidance, that they recognize the IRS has said for years that plan sponsors can use plan forfeitures to reduce administrative expenses, which could reduce contributions to the plan,” Gregory said. “That in of itself is not inconsistent with ERISA.”

The Labor Department is unlikely to put out guidance soon, given their long list of competing priorities, according to Jara.

And even with a clear set of regulations from DOL, the impact of the US Supreme Court’s Loper Bright Enterprises v. Raimondo ruling means that the courts would likely ultimately still have the power to decide how ERISA applies in the absence of Chevron deference. Under Chevron courts long had to defer to reasonable agency interpretations when statutes were silent or ambiguous.

“They would have to create guidance from scratch,” Jara said of the DOL. “There’s not going to be any case law for them to rely upon, and they’re just going to rely on what they believe would be best, and under Loper that’s not going to fly today.”