The use of forfeitures to offset employer contributions is well established and is explicitly permitted under treasury regulations and is consistent with Department of Labor guidance.  So why is this approach an issue now?

The IRS issued proposed regulations in February that would allow plan sponsors to use forfeitures in the following ways: (1) pay plan expenses; (2) reduce employer contributions due to the plan; or (3) increase benefits to other participants in the plan.

Two separate lawsuits have been filed recently accusing fiduciaries of violating ERISA.  Dimou v. Thermo Fisher Scientific, Inc., No. 3:2023cv01732 (U.S. District Court for the Southern District of California) was filed on September 19, 2023.  The second case is Rodriguez v. Intuit, Inc, No. 5:2023cv05053 (U.S. District Court for the Northern District of California) filed on October 2, 2023.  In both situations, the plaintiffs are accusing the misuse of fiduciary power and violation of ERISA when the forfeitures are used to reduce employer contributions due to the plan.

Thermo Fisher maintains a 401k plan that gives the plan the ability to use forfeitures to pay reasonable plan expenses (to the extent not paid by the employer) or to reduce any of the company’s contributions under the plan. Over the six-year period covered by the complaint, the company elected to use forfeitures to reduce employer contributions rather than pay plan expenses.  In the Thermo Fisher case, approximately $23,431,000 of forfeitures were used to reduce employer contributions leaving plan participants to pay expenses ranging from approximately $340,000 to $1,373,000 per year.  In other words, the employer put their interest of saving cash above assisting participants from expenses generated by the administration of the plans.  By doing so they violated their fiduciary duty to the participants of the plan by putting the employer’s interest first.

The Rodriguez case alleges similar facts.

It should be noted that these cases are filed after an 8-0 ruling by the U.S. Supreme Court in 2022 in the Hughes v. Northwestern University, No. 19–1401 (January 24, 2022) in which university employees who claimed that plan fiduciaries violated the Employee Retirement Income Security Act's (ERISA's) duty of prudence by:

• Failing to monitor and control record-keeping fees, resulting in unreasonably high costs to plan participants.

• Offering mutual funds and annuities in the form of retail share classes that carried higher fees than those charged by otherwise-identical institutional share classes of the same investments.

• Offering complex investment options that were likely to confuse investors.

The Supreme Court ruled that plan participants' ability to choose from a large selection of investments, including low-cost index funds, to excuse allegedly imprudent decisions by fiduciaries who oversaw the retirement plan was not an excuse and remanded the case.

These cases may not go anywhere, or it may go somewhere, but it is the beginning salvo of a new round of plan participant attack on the fiduciary responsibilities of the 401/403 accounts.  To be safe, at least initially, if an employer wants to use forfeitures to reduce employer contributions, provide for this in the plan document rather than leaving the decision up to the plan administrator. 

Source:  Groom Law Group, 104/23, ASPPA 8/28/23, SHRM 1/28/22