Novel 401(k) Plan Forfeiture Usage Rulings Tilt Toward Employers

The nascent legal battle over how employers use forfeited money in their 401(k) plans has spurred more than a dozen early rulings, and courts have been siding with defendants at a rate of more than two-to-one.

A new legal theory that emerged in 2023 contends that employers can contravene federal benefits law when they make decisions about how to use the unvested 401(k) money that’s forfeited when workers leave their jobs after short periods. The lawsuits, which target dozens of companies including Mattel Inc., Home Depot Inc., Capital One Financial Corp., and Northrop Grumman Corp., say employers violate the Employee Retirement Income Security Act when they choose to put 401(k) forfeitures toward the contributions they’re required to make to the plan, instead of using them to reduce the administrative fees paid by workers.

Retirement investors have notched a handful of early victories in these cases, with judges greenlighting cases against Qualcomm Inc., Clorox Co., and North American Lighting Inc. But defendants have seen much more success, with at least 10 companies, including JPMorgan Chase & Co., Wells Fargo & Co., HP Inc., and Honeywell International Inc., scoring decisions dismissing these allegations.

Courts weighing these lawsuits, which now target about 60 companies, have homed in on the specific language used in a company’s 401(k) plan document when deciding whether a given use of plan forfeitures passes legal muster. Attorneys predict the cases are unlikely to slow down or produce a significant number of early settlements anytime soon.

“When you have a novel theory like this that’s challenging a longstanding practice, coupled with mixed results on motions to dismiss and no decisions on the merits, that doesn’t typically bode well for early settlements because there are a lot of outstanding issues,” Blake Crohan, an Atlanta-based ERISA litigator with Alston & Bird LLP, said.

Language Matters

The specific language of a 401(k) plan document has emerged as an important consideration in these cases. JPMorgan defeated litigation over its forfeiture usage after a California federal judge parsed the terms of its 401(k) plan and found they only allowed the company to use forfeitures to pay its own share of plan expenses, and not the share paid by workers.

“Frankly, this litigation probably turns on plan language more than anything else,” Eric W. Gregory, co-chair of the employee benefits and executive compensation group at Dickinson Wright PLLC, said.

Many large 401(k) plans use pre-approved documents that include “boilerplate language” governing forfeiture use, Gregory said. This language often gives plan sponsors discretion to choose among a few permissible uses, he said.

That discretion is a key component of the legal theory underpinning these cases. Plaintiffs have a “strong argument” that plan fiduciaries violate their duties when they’re given an “either/or choice” over how to use forfeitures and they choose the option that benefits the company instead of the one that benefits participants, Daniel R. Ferri, a partner with DiCello Levitt LLP, said.

Employers seeking to mitigate their litigation risk should review their 401(k) plan documents and consider whether they should be amended to eliminate their discretion over how to use forfeitures, Gregory said.

“It’s worthwhile for any employer to go through that exercise,” he said.

Even so, it’s unclear whether such an amendment could fully protect against litigation.

Retirement plan fiduciaries “may not have to maximize the pecuniary benefit to the plan members, but they still have an obligation to handle the plan in a way that is in the best interests of the participants,” Sharon S. Almonrode, a partner with Miller Law Firm in Detroit, said. “No matter how they try to amend that, if they’re making a decision that favors the employer, that’s problematic.”

Looking Forward

District judges in California, Arizona, Virginia, Illinois, South Carolina, and Washington have ruled on 401(k) forfeiture disputes, but the issue has yet to be weighed by a federal circuit court.

Two appeals are pending in the US Court of Appeals for the Ninth Circuit: one involving HP Inc. and another involving Knight-Swift Transportation Holdings Inc. A few cases have been put on pause until the HP appeal is resolved, including lawsuits against Qualcomm, Mattel, and Albertsons Cos. Inc.

Attorneys are paying close attention to how the Ninth Circuit handles these issues.

If the Ninth Circuit rejects the forfeiture claims based on the specific plan language before it, that may provide comfort to employers with similarly-worded plans, Crohan said. But if the court issues a broader ruling—for example, by finding no legal violation in a company’s use of 401(k) forfeitures to make employer contributions—then that could throw a much bigger wrench into this litigation push, he said.

The appeals court hasn’t yet scheduled arguments in the HP case.

Ongoing Battle

Defendants may have notched more early victories in these cases, but courts are still allowing cases to advance in some circumstances. Last week, an Illinois federal court greenlighted forfeiture claims against North American Lighting after noting that the defendants “never actually contest” the argument that they weren’t acting in workers’ best interests when they opted to use forfeitures to make mandatory employer contributions to the 401(k) plan.

Workers challenging plan forfeiture use have “very strong, straightforward claims given the right plan language,” Ferri said.

“If a plan gives a fiduciary the discretion to use these funds to pay administrative expenses, which is clearly for the benefit of plan participants, or to offset company contributions, which is clearly for the benefit of the company, then I at least personally cannot see how it could possibly be OK for the fiduciary to choose the decision that benefits the company instead of the one that benefits the plan participants,” he said.