How Plan Sponsors Can Defend Against Increased 401(k) Litigation

Courts, regulators, and plaintiffs’ firms are testing the boundaries of fiduciary duty under the Employee Retirement Income Security Act of 1974, or ERISA, with a new wave of class actions. 401(k) forfeitures are no longer a technical detail; they are a litigation flashpoint. Employers that ignore the issue risk costly lawsuits, negative press, and employee mistrust. The best defense is a proactive one: clear plan terms, documented fiduciary process, transparent communications, and timely application of forfeitures.

For decades, forfeitures—the portion of employer contributions that revert to the plan when employees terminate their employment before the vesting date—were an accounting afterthought. Plan sponsors routinely used them to offset future contributions, consistent with long-standing IRS practice and plan language. That quiet equilibrium ended in late 2023. Since then, almost 70 class actions have been filed, targeting some of the nation’s largest employers, including HP, Amazon, Bank of America, Qualcomm, and UBS. The complaints allege that using forfeitures for contribution offsets violates ERISA fiduciary duties, contravenes the statute’s anti-inurement clause, and constitutes prohibited transactions.

Two recent cases illustrate the stakes. In Hutchins v. HP Inc. (N.D. Cal. 2025), the court dismissed all claims with prejudice, holding that offsets were consistent with plan terms and did not constitute inurement. By contrast, in Becerra v. Bank of America (W.D.N.C. 2025), the court denied dismissal, allowing plaintiffs to probe fiduciary discretion. With appeals pending and the Department of Labor weighing in with an amicus brief on the Hutchins case, the legal landscape is in flux.

What’s at Stake for Employers and Fiduciaries

The financial scale is enormous. In Curtis v. Amazon.com, plaintiffs allege that hundreds of millions in forfeitures were directed to contribution offsets. These sums, while modest in relation to trillion-dollar retirement markets, are significant enough to fuel class actions, reputational risk, and potential regulatory scrutiny. For household-name employers, the litigation risk extends beyond damages: ERISA class actions often dominate headlines, trigger investor inquiries, and complicate employee relations.

The DOL’s July 2025 amicus brief supporting HP was a rare alignment with defendants. The agency argued that applying forfeitures to reduce contributions, “without more,” does not violate ERISA. That stance, if adopted by appellate courts, could blunt the plaintiffs’ central theory. Still, the very fact of litigation—combined with unsettled law—means sponsors must prepare for scrutiny. Recent analyses indicate that as of August 2025, approximately 70 forfeiture lawsuits have been filed, with district courts granting motions to dismiss in the majority, though rulings remain inconsistent across jurisdictions like Minnesota and Massachusetts, where standing issues have led to dismissals in cases such as Nykiel v. Smith & Nephew (D. Mass. Aug. 30, 2024). Despite a 75% success rate for defendants in initial rulings on around 60 class actions since September 2023, the ERISA plaintiffs’ bar has filed 40 new suits in the first eight months of 2025 alone (seven new cases being filed within a six-week period), underscoring the persistent threat and the need for vigilant plan management.

Doctrinal Crossroads

The forfeitures cases turn on three provisions:

1. ERISA’s fiduciary duty of prudence and loyalty (§404),

2. ERISA’s anti-inurement rule (§403(c)), and

3. Prohibited transaction provisions (§406).

Plan Document Primacy: Courts, such as in Hutchins, have emphasized §404(a)(1)(D), which requires fiduciaries to follow plan documents. Where the plan expressly authorizes forfeiture offsets, courts are reluctant to impose new fiduciary mandates.

Anti-Inurement: Plaintiffs argue that offsets benefit employers. Courts have disagreed, noting that funds remain in trust. As one court wrote, “to inure means to pass into ownership, not merely to reduce an employer’s funding obligation.”

Prohibited Transactions: Plaintiffs invoke §406, but most courts find no bilateral “transaction” when forfeitures are applied internally. Successful claims may require allegations of conflicts, self-dealing, or external transfers. This judicial trend is evident in decisions like Matula v. Wells Fargo, where standing was denied because plaintiffs received plan benefits as promised, and courts rejected per se breach theories, emphasizing context-specific prudence inquiries supported by the DOL’s view that funding matching contributions via forfeitures aligns with regulations. Universally, since early rulings in Qualcomm and Intuit, courts have held that internal reallocations do not constitute transactions under §406(a) or (b), and incidental employer benefits fail to trigger anti-inurement, as assets do not revert out of the plan.

How Fiduciaries Can Protect Themselves

The new litigation wave makes clear: sponsors cannot treat forfeitures as a back-office footnote. They must elevate governance to the same level as fees and investments.

1. Drafting Precision: Plan language is the first line of defense. Sponsors should ensure their documents explicitly authorize forfeiture uses—offsets, expenses, reallocations—and, where appropriate, set a priority order. Ambiguous terms invite litigation. Sponsors should review amendments against actual practice to prevent mismatches. Thoughtfully drafted provisions detailing permitted uses, as reinforced in Hutchins, can prevent overly broad theories that fiduciaries must always prioritize expenses over offsets, especially when plans grant discretionary authority.

2. Governance and Documentation: Courts scrutinize process as much as outcomes. Fiduciary committees should record deliberations, note alternatives, and consider independent cost analyses. Minutes should reflect active decision-making, not rubber-stamping. In discovery, a well-documented record may be decisive. This approach aligns with cases like Rodriguez v. Intuit (N.D.Ca. July 15, 2025), where courts examined fiduciary discretion in applying forfeitures, highlighting that even authorized uses must demonstrate loyalty if challenged.

3. Transparency with Participants: Sponsors must align disclosures with reality. Summary plan descriptions, FAQs, and HR communications should not imply forfeitures always pay expenses if they are also used for offsets. Inconsistent messaging creates fertile ground for plaintiffs’ claims.

4. Compliance with Timing Rules: The IRS’s proposed 12-month deadline raises the stakes. Large suspense balances are red flags. Sponsors should adopt procedures to apply forfeitures promptly, document timing, and avoid stockpiling funds.

5. Litigation Readiness: Sponsors should assume forfeiture practices may be litigated and maintain a litigation file: plan terms, deliberation minutes, independent analyses, and legal memos. In motion practice, citing Hutchins, the DOL amicus, and the IRS regulation may bolster defenses. Early preparation reduces the risk of costly discovery battles. Proactive reviews of plan documentation, as advised amid appeals in seven cases across the Ninth, Third, and Eighth Circuits, can mitigate risks, particularly with the Hutchins appeal fully briefed and poised for the first appellate ruling.

Where the Law is Headed

The US Court of Appeals for the Ninth Circuit’s decision in Hutchins will be pivotal. A ruling affirming dismissal could deter new filings. A reversal could embolden plaintiffs and expand theories nationwide. Meanwhile, fact-specific survivals like Becerra suggest that even with clear plan terms, fiduciary process can be litigated.

Regulators may add clarity. The IRS is expected to finalize forfeiture rules, and the DOL could issue formal guidance following its amicus. But until then, plaintiffs will continue to press novel claims, and settlement pressure will remain high. Conflicting decisions, such as denials in Stewart v. Nextera Energy due to ambiguous “administrative expenses” language and grants in Naylor v. BAE Systems emphasizing regulatory consistency, indicate that while dismissals predominate, uncertainty persists, urging sponsors to monitor appellate outcomes for broader clarity.

Takeaways

As one court noted, “good process, not guaranteed outcomes, defines fiduciary prudence.” Plan sponsors who heed that lesson will be best positioned to withstand the next wave of ERISA scrutiny. This principle, echoed in amicus briefs from industry groups such as the Chamber of Commerce, underscores that adhering to plan documents consistent with ERISA preserves stability in benefit administration amid evolving challenges.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Samuel Krause is a partner at Hall Benefits Law.

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