Clarity in plan documents regarding the use of forfeitures has proven to be a solid defense for plan sponsors, as lawsuits alleging that it is a misuse to pay future employer contributions from forfeitures continue to pop up.
Questioning Common Practice
Over the past year, the spate of allegations questioning the appropriate use of forfeitures has been perplexing, given that the related federal positions have not changed. Nonetheless,ERISA experts remind us that the lawsuits shine the spotlight on how forfeitures “fit into the fiduciary duties of prudence and loyalty set out in Title I of ERISA….” Accordingly, it’s a good idea for plan sponsors to double down on the consistent and documented use of prudent processes related to the application of forfeitures to offset employer contributions.Specifically, Carol Buckmann, ERISA attorney at Cohen & Buckmann advises: “The Department of Labor has never objected to the longstanding IRS position on plan forfeitures, but it is important that plan sponsors authorize the use of forfeitures in their plan’s language.”
The eyes and ears of ERISA defense experts have been tuned into the unusual allegations probing the use of plan forfeitures, fearing that if even one makes it past the motion to dismiss stage, a larger swirl of copycat allegations could follow, as was the case with litigation over plan fees and investments. The recent dismissal of allegations against BAE Systems related to the use of forfeitures, obtained by Groom Law Group, underscores how the clarity of the plan document–and adherence to it–paves the way for strong defense. Groom Law Group, Chartered offers this summation of the dismissal:
BAE Systems’ 401(k) plan document expressly provided that forfeitures “shall” be used to 1) restore the accounts of participants who forfeited employer contributions by leaving the company before the contributions vested, but who rejoined the company within five years; and 2) reduce future employer contributions. The plaintiff argued that, despite the plan’s mandatory language, forfeitures should have been used to pay administrative expenses or been credited to participants’ individual accounts.
The Court squarely rejected plaintiff’s argument, concluding that the plan language did not provide the fiduciary any choice with respect to how to use forfeitures. Specifically, the Court ruled “Plaintiff’s position regarding forfeitures reduce to an argument that Defendant was required by ERISA to disregard the terms of the Plan and, contrary to the terms of the Plan, prioritize the use of forfeitures for, inter alia, the payment of administrative costs or a windfall to Plan participants, a proposition uniformly rejected by the courts.”
Mitigating Risks
Retirement plan sponsorship is a role that comes inherent with risks that can never be fully eliminated. However, risk mitigation is possible, and more critical than ever, given that “Entrepreneurial-minded attorneys are flocking to uncover breaches of fiduciaries’ ERISA duty….” An important way to mitigate the litigation risks posed by the rise of forfeiture allegations is to carefully review related plan terms, as Groom Law Group, Chartered reminds us, related to the BAE dismissal:
The Court’s ruling is a significant victory for defendants in the newest wave of ERISA litigation. The decision underscores that including plan terms that eliminate discretion by directing how forfeitures are to be used can mitigate litigation risk. The Court’s recognition that the plan participants in these cases are essentially seeking a “windfall” is of equal importance and may be persuasive to courts considering similar claims.
Experts continue to agree that securing protection is another critical step toward mitigating the many risks inherent with plan sponsorship:“Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits.” Remember, Colonial Surety Company is here to help with fiduciary liability insurance that plan sponsors from businesses of all sizes can afford. Armed with our coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Conveniently, our Fiduciary With Cyber liability package is now available with just a one year commitment. Protect yourself, your business and plan, for a few dollars a day, now:
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