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In a recent legal development, several major companies, including Qualcomm Inc., Intuit Inc., Clorox Co., and Thermo Fisher Scientific Inc., have found themselves embroiled in lawsuits that question handling forfeited 401(k) money. The central issue revolves around whether these companies may violate federal law due to their approach to dealing with these funds, specifically employer contributions. This legal theory is contingent on the specific language in the respective retirement plans.
The Issue at Hand
At the heart of these lawsuits is the segment of an employee’s 401(k) account funded by their employer’s contributions. Unlike contributions from an employee’s salary, which are immediately vested, employer contributions can remain unvested for a certain period. They can be partially or entirely forfeited when an employee departs from the company after a few months or years.
The crux of the matter is that these lawsuits contend that employers run afoul of the Employee Retirement Income Security Act (ERISA) when they use their discretion over these forfeitures to benefit themselves instead of the workers. It is alleged that these companies have utilized these forfeitures to reduce their financial obligations to the retirement plans rather than allocating these funds to reduce the administrative expenses employees incur.
It’s noteworthy that the practice of using 401(k) forfeitures to offset employer contributions has been approved by regulators when executed correctly, according to legal experts interviewed by Bloomberg Law. However, this practice has come under scrutiny due to four recent cases initiated by Hayes Pawlenko LLP, a small employment law firm based in California.
The Role of Plan Terms
As with many ERISA disputes, the outcome may largely hinge on the language articulated in the specific plan documents. Numerous 401(k) plans outline how forfeited money should be utilized, whether for covering administrative costs or directing it toward employer contributions. Some documents offer detailed instructions on the matter, while others are more ambiguous and grant a level of discretion.
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The legal complaints against Qualcomm, Intuit, Clorox, and Thermo Fisher each argue that the pertinent plan documents bestow discretion upon employers to decide whether forfeitures should be allocated to expenses or contributions. Legal experts emphasize the significance of this particular detail in the cases.
The fact that these companies appear to be acting within the parameters set by their plans might pose a considerable obstacle for the plaintiffs. It remains to be seen if this use of forfeitures is genuinely a violation of ERISA, as indicated by Alex C. Lakatos, a partner at Mayer Brown LLP in Washington.
Fiduciary Obligations Under Scrutiny
ERISA mandates that plan fiduciaries act in the best interests of their participants. The lawsuits posit that if a fiduciary chooses to use funds to lower participants’ expenses instead of its own, it breaches its duties.
However, some experts argue employers aren’t obligated to provide retirement plans or specific compensation levels within legal limits. Decisions regarding benefit levels are primarily questions of plan design rather than fiduciary actions.
The flexibility given to employers in utilizing plan forfeitures doesn’t necessarily signify that they are acting in a fiduciary capacity under ERISA. Guidance from the Internal Revenue Service underscores that employers have discretion concerning these forfeitures.
While some experts express skepticism about the success of these cases, others contend that the legal theory advanced in these lawsuits could be viable if specific conditions are met. According to Brock J. Specht, a partner at Nichols Kaster PLLP in Minneapolis, a fiduciary’s primary duty is to use the money in the participants’ interest, not for the employer’s benefit.
What’s Next?
The world of class litigation under ERISA often follows patterns. Recent cases have targeted various aspects of retirement plans, including those sponsored by universities, those offering specific investment options, and pension plans utilizing outdated life expectancy data. As more cases arise under particular statutes, smaller law firms may take the opportunity to file similar cases, potentially leading to the emergence of novel legal theories.
Plaintiffs’ firms are incentivized to uncover common practices that may not adhere to legal standards, potentially fueling a new wave of litigation. If a widespread practice is deemed improper by a court, it could herald the “next era” of litigation, according to experts in the field.
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