Claims focused on “failed fiduciary process” related to the use of plan forfeitures continue to bubble up. With the lawsuits winding through federal courts, it’s too early to know if they will trigger the same flow of copycat cases that has swirled up over fees and investments, but it’s wise for plan sponsors to be alert and take precautions.
Reviewing Plan Documents
As the trickle of lawsuits accusing retirement plans “of misusing forfeited retirement funds to pay for future employer contributions,” continues, ERISA defense attorneys advise plan sponsors to proactively review the forfeiture provisions in their plan documents. Specifically, as Plan Sponsor reports:
Michael Schloss, of counsel at the Wagner Law Group, says use of forfeiture amounts
is “built into the structure of these types of plans.” In a law alert from his firm…Schloss also wrote that “consideration should be given to whether fiduciary decisions relating to forfeitures could be seen as relieving the employer of an obligation to the plan and imposing additional costs on participants and whether action should be taken now that might mitigate any litigation risk going forward.”
The Wagner alert came just days after a new fiduciary breach suit was filed against retailer Nordstrom Inc., citing use of forfeitures, the costs of a managed account service and excessive recordkeeping fees, and shortly after the revival of an earlier forfeiture case against HP Inc., which was initially dismissed…. The new case…was filed… in U.S. District Court for the Western District of Washington. The plaintiffs are seeking class action status.
Essentially, this latest lawsuit claims that those responsible for the defined contribution plan “failed to fulfill their fiduciary duties to prudently and loyally ensure the Plan’s total recordkeeping and other administrative expenses were reasonable and not excessive, as well as engaged in self-dealing with regard to Plan forfeitures in violation of ERISA fiduciary prohibited transaction rules.” As federal judges dig into several similar ERISA allegations which are now in motion related to the appropriate use of forfeitures, Schloss observes that they “will have to sort out how those funds fit into the fiduciary duties of prudence and loyalty set out in Title I of ERISA…,” and believes, ultimately, “this can be resolved in plan documents.”
Good To Know–and Do
If you are a plan sponsor, and you do not know what your plan document says about the use of forfeitures, it’s a very good idea to find out. At the National Association of Plan Advisors, Jenny Kiffmeyer points out that plan documents typically provide for accumulated forfeitures to be used in one of these three ways:
- Pay certain plan expenses;
- Reduce employer contributions; or
- Be allocated as additional employer contributions.
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.” It’s also wise 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. Although the emergence of ERISA litigation concerning long-standing protocols for forfeitures is surprising, it’s important for plan sponsors to be mindful that
If even one of the allegations passes the motion to dismiss stage of legal proceedings, copycats are likely to follow–and fast.
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