In rapid succession, four large companies have been served with lawsuits claiming that a long-standing industry practice in 401(k) plan management violates ERISA by favoring employers over participants.
Each lawsuit, filed between Sept. 19 and Oct. 18 in California federal courts, challenges the strategy of dealing with what happens when participants leave a plan before their company contribution vesting period is complete. Each suit was filed by a participant in the respective plan and seeks class-action status.
The lawsuits appear to set up a clash between what companies are allowed to do, according to Internal Revenue Service rules, and what ERISA requires them to do. IRS rules say defined contribution plans can use forfeiture money to offset plan expenses or reduce employer contributions to the plan. The lawsuits said the latter approach violated ERISA's duty of loyalty, which says participants' benefits cannot be secondary to plans' interests.
The lawsuits allege the companies and their fiduciaries violated ERISA's duty of prudence, which in these cases refers to plans' responsibilities to reduce administrative expenses where possible.
The lawsuits also contend that the plans' practices violate ERISA standards for prohibited transactions. In these cases, defendants "deal with the assets of the plan in their own interest and their own account."
Departing participants can take their own 401(k) contributions when they leave, but they forfeit the remainder of company contributions depending on a plan's rules. The vesting requirements vary among plans covering nonelective corporate contributions, which don't rely on employees' contributions, and company matching payments.
The lawsuits acknowledged that reducing corporate contributions to plans due to forfeited accounts is permissible for the defendants.
"At the discretion of defendants, forfeited nonvested accounts may be used to pay the plan's expenses or reduce company contributions to the plan," said the lawsuit against The Clorox Co. filed Oct. 18 in a U.S. District Court in Oakland, Calif.
However, a Clorox complaint, like those against other companies, faulted plan executives for reducing company contributions rather than cutting plan expenses. Clorox's action was done "exclusively for the company's own benefit, to the detriment of the plan and its participants," the lawsuit said.
The Clorox lawsuit language is similar to that of the lawsuits against Intuit, Thermo Fisher Scientific and Qualcomm.
According to the lawsuits, the vesting period for Thermo Fisher Scientific's corporate match is two years. For Qualcomm's contributions, the vesting period is 50% for the first-year anniversary of a participant's hire and 100% on the second anniversary.
For Intuit, complete vesting for the company match is "over a period of years, depending on when the participant was hired." For Clorox, nonelective contributions "vest in varying rates over a period of five years."
Attorneys Matthew B. Hayes and Kye D. Pawlenko of law firm Hayes Pawlenko LLP, who represent plaintiffs in all of the lawsuits, didn't return a request for comment.
"We have reviewed the complaint and believe that the claims lack merit," a Clorox spokesperson wrote in an email. "Clorox and the employee benefits committee are working to defend against these claims."
Representatives of Qualcomm and Thermo Fisher Scientific didn't return requests for comment.
Intuit is "reviewing the matter," a spokesperson wrote in an email. "We are proud to offer our employees best-in-class benefits designed to support health and financial well-being for themselves and their families."
A fifth company, HP Inc., was sued Nov. 14 by a participant in the company's 401(k) plan, represented by the same law firm and making the same allegations about the plan's forfeiture practice. Participants are subject to a three-year cliff vesting schedule for the company match, after which they are 100% vested, the lawsuit said. A company representative didn't respond to a request for comment.
Some retirement industry members expressed surprise at the lawsuits given the history of plans being able to choose how to spend forfeited nonvested accounts..
"This is clearly a lawyer-driven, manufactured attempt to create a new legal theory," said Daniel Aronowitz, managing principal of insurance firm Euclid Fiduciary. "This doesn't have merit."
ERISA attorney Jennifer Eller said her firm, Groom Law Group, is monitoring the litigation.
"It looks opportunistic," said Eller, who represents sponsors in ERISA cases.
"I don't think there's a legal basis, but litigation is unpredictable," added Eller, a principal at the firm. "Sponsors have choices. You have discretion as a fiduciary for multiple uses of plan assets."
The industry's response may depend on how plans' ERISA attorneys and consultants assess the prospects of these lawsuits, said Robert Richter, retirement education counsel for the American Retirement Association.
Although the IRS permits flexibility and many sponsors' plan documents permit flexibility, some who want to reduce employer contributions may write specific language in the plan documents, he said.
These lawsuits "could cause concern" among plans that offer fiduciaries flexibility in using forfeited nonvested accounts, he said. "One way around that would be specific" in the plan document to authorize reducing contributions.
