The Forfeiture Lawsuit Threat to 401(k) Plans: A Call for Compliance and Proactive Steps
Recent lawsuits targeting the management of forfeited assets in 401(k) plans are raising concerns within the retirement plan industry. A major legal challenge has emerged, potentially reshaping how plan sponsors handle employer contributions that participants forfeit due to leaving the company before vesting. This issue hinges on whether forfeited assets, often used to offset future employer contributions, are considered plan assets and, if so, how they should be managed under the Employee Retirement Income Security Act (ERISA).
The Legal Debate: ERISA Violations and Plan Sponsor Obligations
Traditionally, many 401(k) plan sponsors have utilized forfeited assets—those unvested employer contributions—to reduce their own financial obligations. This practice has been long-standing and generally accepted. However, recent lawsuits suggest this practice may be in violation of ERISA, which mandates that fiduciaries of retirement plans act solely in the interest of plan participants and beneficiaries.
On February 7, 2025, a prominent case was filed against Charter Communications by the Schlichter Bogard law firm, claiming that the company’s use of forfeited assets to offset its matching contribution violated ERISA. The plaintiffs argue that these forfeited funds are, in fact, plan assets that must be used exclusively to benefit the plan participants. Should these lawsuits succeed, they could redefine how employers administer forfeited assets and force a reevaluation of common practices within retirement plans.
The Impact on 401(k) Plan Administration
If these lawsuits prove successful, 401(k) plan sponsors may face considerable changes in how they manage forfeited assets. Plan fiduciaries could be required to take more stringent steps to ensure that forfeited funds are used for the exclusive benefit of the participants and beneficiaries, rather than reducing employer contribution obligations. This could involve major administrative shifts, as well as greater scrutiny of plan policies related to forfeitures.
For companies that currently utilize forfeited assets to offset contributions, the potential legal implications are significant. Beyond the immediate financial impact, failure to comply with ERISA fiduciary standards could expose plan sponsors to litigation, penalties, and reputational damage.
Steps to Safeguard Your Business
To prevent your business from falling prey to potential forfeiture lawsuits and ensure full compliance with ERISA, consider the following proactive steps:
Review Your Plan’s Forfeiture Policy: Examine how your company’s 401(k) plan handles forfeited assets. Are these funds being used to offset employer contributions? If so, you may need to reassess this practice in light of the new legal challenges. Consult with legal professionals to determine if your policy adheres to ERISA’s fiduciary standards.
Consult with ERISA Experts: Work with legal experts who specialize in ERISA compliance to conduct an audit of your plan’s practices. A thorough review can help ensure that you are operating within the law and mitigate the risk of litigation. Ensure that any decisions regarding forfeited assets align with the best interests of your plan participants.
Revise Plan Documents and Communication: Ensure that your plan documents clearly outline how forfeited assets will be handled. This transparency can help prevent misunderstandings or claims that assets were mishandled. Additionally, communicate any changes to your plan participants to ensure they are informed about the updated policies.
Consider Alternative Methods for Handling Forfeitures: Explore alternative methods for using forfeited assets, such as redirecting the funds into a separate account dedicated solely to the benefit of participants. Some plan sponsors may opt to allocate forfeitures towards reducing plan administrative fees, provided this approach is compliant with ERISA regulations.
Stay Informed on Legal Developments: Given the evolving legal landscape surrounding 401(k) forfeitures, it’s important to stay up-to-date on new lawsuits and judicial rulings. By monitoring these developments, you can adjust your practices as needed to maintain compliance and reduce risk.
The growing trend of forfeiture-related lawsuits against 401(k) plan sponsors is a stark reminder of the importance of ERISA compliance. As the legal landscape evolves, plan sponsors must take proactive steps to ensure their retirement plans are administered in a way that benefits plan participants and complies with fiduciary standards. By reviewing forfeiture policies, consulting with experts, and exploring alternative approaches, businesses can avoid potential pitfalls and safeguard their operations from costly legal consequences.
