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The growing legal threat of 401(k) forfeiture class actions: What plan sponsors need to know

3/18/25

By: Thomas R. Starks

While ERISA class action lawsuits have been a growing concern for plan fiduciaries, a recent trend is the surge of class action lawsuits challenging the handling of 401(k) plan forfeitures.   

Understanding 401(k) Plan Forfeitures 

Some 401(k) retirement plans receive employer contributions subject to a vesting schedule; if the employee departs before the contribution fully vests, the unvested portion of the employer’s contribution is forfeited. These forfeitures accumulate within the plan and can be utilized in various ways, depending on the plan’s provisions.  

The U.S. Department of the Treasury has provided guidance that permissible uses of forfeitures in retirement plans include reducing employer contributions, paying plan administrative expenses, increasing benefits for remaining participants, or other uses as specified in the plan documents. Notably, the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) has not issued specific guidance contradicting this approach. The EBSA is unlikely to weigh in on this soon because its ERISA advisory council is operating under a cloud of uncertainty pending potential DOL funding cuts. 

Emergence of Forfeiture-Related Class Action Lawsuits 

Despite the longstanding tacit acceptance of the IRS and DOL in allowing forfeitures to offset employer contributions, a wave of class action lawsuits has emerged challenging this practice. In the last two years, dozens of 401(k) forfeiture lawsuits have been filed against companies across various industries, including major corporations like Amazon, HP, Trader Joe’s and Charter Communications. These lawsuits allege that using forfeited unvested contributions to reduce the employer’s matching contribution violates the fiduciary duties of loyalty and prudence, constitutes self-dealing, and violates the terms of the plan documents.   

Best Practices for Plan Sponsors to Avoid Forfeiture Account Suits 

1. Plan Document Review: It is imperative for plan sponsors to meticulously review their plan documents to ensure that the use of forfeitures aligns with the terms specified. Plan sponsors should ensure documentation such as the Investment Policy Statement (IPS), Summary Plan Description (SPD) and other plan documents include provisions that allow for the use of forfeiture accounts to offset employer contributions. Essentially, the plan documents must be followed in the administration of the plan. When the IPS allows plan administrators the choice of using the forfeitures account to offset plan expenses or to offset employer contributions, if the trustees choose to offset employer contributions it is arguably not in the best interest of plan participants. Because the plan trustee is using discretion, they are a fiduciary. However, if the IPS does not allow for discretion, then the trustee is usually performing a ministerial duty. Thus, to avoid a self-dealing claim, the plan documents should only allow the forfeitures account to be applied to future employer matches and not allow trustees discretion to apply the funds to other plan expenses, as this would constitute a ministerial duty. 

2. Adherence to Regulatory Guidance: While current regulations permit the use of forfeitures to offset employer contributions, this is the bare minimum and insufficient to keep plaintiffs’ attorneys from initiating a class action lawsuit. Plan sponsors should stay informed about any changes in guidance and ensure their practices remain compliant. 

3. Fiduciary Training: Providing comprehensive training for fiduciaries on their responsibilities can help prevent practices that could be construed as breaches of fiduciary duty.   

4. Litigation Preparedness: Given the increasing trend of 401(k) lawsuits, plan sponsors should work closely with legal counsel to assess potential vulnerabilities and develop strategies to mitigate litigation risks. Staying up to date on litigation trends can be critical. Being on top of the trends can help protect a plan down the line. Trustees should examine their plans in relation to new 401(k) litigation trends to address any issues early on.   

Conclusion 

The recent wave of ERISA class action lawsuits concerning 401(k) plan forfeitures highlights the evolving nature of retirement plan litigation. While regulatory guidance has long permitted certain uses of forfeitures, the legal challenges presented by these cases underscore the necessity for plan sponsors to diligently review and, if necessary, revise their plan practices and documentation. Proactive measures, including compliance audits and fiduciary education, are essential steps in navigating this complex and changing legal landscape. 

For more information, please contact Thomas R. Starks at thomas.starks@fmglaw.com or your local FMG attorney.