The Fight Continues: How Should Forfeitures Be Used?

Despite dismissals in most of the ERISA lawsuits alleging that retirement plans are wrongfully using forfeited employer contributions to curtail the cost of future contributions rather than to benefit participants, new claims continue to weave their way into court–and advance. Recently, for example, the U.S. District Judge Eric Tostrud, presiding in U.S. District Court for the District of Minnesota, allowed a forfeiture claim against UnitedHealth to proceed to discovery. Read on for legal insights and advice for ERISA plan sponsors from businesses of all sizes. 

If At First You Don’t Succeed…

Try, try again? This seems to be the mantra of ERISA plaintiff attorneys. As 

Nevin Adams has pointed out at the National Association for Plan Advisors, despite successful defense against claims alleging that “using forfeitures to reduce employer contributions benefit the employer at participants’ expense,” the lure of pressing forward with arguments centered on breaches of the fiduciary standards of prudence and loyalty remains strong. Reporting for Plan Sponsor, James Van Bremer relays these facts on the latest attempt: 

• A federal judge ruled that participants in UnitedHealth Group’s 401(k) plan may continue to pursue fiduciary breach claims alleging the company improperly used millions of dollars in forfeited retirement contributions to reduce its own funding obligations, rather than to offset plan expenses.
• The decision…marks another significant development in a fast-growing line of ERISA litigation challenging how defined contribution plans allocate forfeited employer contributions. 
• The forfeitures come from plan participants who left the employer and the plan before being fully vested in the employer’s contributions.
• While plan documents often permit forfeitures to be used either to reduce future employer contributions or to pay plan administrative expenses, plaintiffs have increasingly argued that fiduciaries must independently determine which option best serves participants’ interests, rather than automatically selecting the approach that benefits the employer.
• The Department of Labor…has made clear…that it sides with employers in these cases, but that has not prevented some district court victories for plaintiffs.

Although the court “dismissed claims asserting the forfeiture decisions violated ERISA’s anti-inurement rule or constituted prohibited transactions, finding the complaint did not plausibly support those theories,” U.S. District Judge Eric Tostrud

denied the motion to dismiss, “finding that the plaintiffs plausibly alleged the plan suffered an economic injury and that fiduciaries may have breached their duties of prudence and loyalty to participants under the Employee Retirement Income Security Act.”  

The case will now move to discovery, during which plaintiff attorneys will be looking for evidence of the decision-making process used by fiduciaries of the plan, and examining whether they “acted solely in participants’ interests when allocating forfeited plan assets.”

Action Steps For Plan Sponsors: Take Precautions

Clearly, ERISA forfeiture lawsuits are not going away anytime soon—and if history is a predictor, new types of allegations against retirement plan sponsors will continue to be explored by plaintiff attorneys. Remember, as Eric Dyson cautions: “There is nothing a plan sponsor can do to prevent a lawsuit from being filed. Plaintiffs’ firms do not need proof of wrongdoing. They need public data and a plausible theory.”

Toward being defense ready for forfeiture allegations, Carol Buckmann, of 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.”

ERISA defense attorneys at  Groom Law Group also underscore that the clarity of the plan document–and adherence to it–paves the way for strong defense, noting in particular “that including plan terms that eliminate discretion by directing how forfeitures are to be used can mitigate litigation risk.”

At Plan Sponsor Council of America, Groom Law Group principal, David Levine, further encourages plan sponsors to assess the alignment of their plan documents and decision making processes, noting: “it’s a consideration if sponsors would like to clarify what the hierarchy is, when it comes to which comes first, defraying fees or offsetting contributions.”

Defense Is Costly, Protection Can Be Affordable

Running a small or mid size business and retirement plan does not make you a small target. ERISA applies to you with the same force it applies to Fortune 500 companies. Your fiduciary obligations are personal. Your exposure is real.

In the event of ERISA allegations, defense is an out of pocket expense for plan sponsors, and costs add up quickly, averaging $600—per hour. To ensure all retirement plan sponsors have protection, Colonial Surety Company offers an affordable Fiduciary+Cyber Liability Package that can be bundled with the Department of Labor’s required ERISA Fidelity Bond. (Remember, an ERISA Bond protects the retirement plan from losses due to theft or fraud—it does not protect a plan sponsor in the face of errors, oversights or allegations of a fiduciary breach.)

The Colonial Surety Company ERISA Bundle combines three essential protections in one seamless package:

• ERISA Fidelity Bond — Fulfills your federal mandate to protect plan assets from fraud and dishonesty
• Fiduciary Liability Insurance — Provides up to $1,000,000 in coverage for legal defense costs and penalties arising from fiduciary errors, administrative oversights, and participant claims
• Complimentary $50,000 Cyber Liability Insurance — Protects your plan and company against regulatory actions following a data breach, addressing the DOL’s cybersecurity guidance directly by including expert response services.

Colonial Surety is Treasury-Listed, rated “A” (Excellent) by AM Best, and has been in business since 1930. As a direct carrier — not a broker — there are no agent markups or unnecessary fees. You can quote, purchase, and download proof of coverage entirely online in minutes.

For a small business owner sponsoring a retirement plan, this bundle is the practical, affordable answer to a very real set of risks that most small and mid size plan sponsors are carrying unknowingly every single day.

Don’t wait for a participant complaint, DOL inquiry, or cyber threat to find out what you’re missing. Get an instant quote on Colonial Surety Company’s ERISA Bundle today — and protect your plan, your business, and your personal assets in one smart move.

👉Get Your Instant Quote & Download Proof of Coverage In Minutes