Another 401(k) forfeiture lawsuit has been dismissed, and plan sponsors should pay attention because this litigation trend has generated a lot more noise than clarity.
In Lapko v. United Wholesale Mortgage, former employees challenged the company’s use of forfeitures from unvested employer contributions. They argued that the plan committee should have used those forfeitures to pay plan expenses instead of using them to reduce future employer contributions.
The federal court in Michigan wasn’t buying it.
The plan document said forfeitures “may” be used to pay administrative expenses, while forfeitures not used for expenses “shall” reduce employer contributions. The plaintiffs tried to turn that discretion into a fiduciary requirement, arguing that using forfeitures for expenses would have benefited participants more.
The court rejected that argument.
The important point is that ERISA fiduciary duties don’t automatically convert a permissible choice under the plan document into a mandatory one simply because another choice might have financially benefited participants. The court also rejected the prudence and prohibited-transaction claims.
This is another victory for a plan sponsor in the recent wave of forfeiture litigation, but I wouldn’t treat it as permission to become sloppy.
Forfeitures are still plan assets. Fiduciaries still need to follow the plan document, and the language in that document matters tremendously. The court also noted that other courts have disagreed on some of these issues, so this area isn’t necessarily finished developing.
The lesson for plan sponsors is pretty simple: know what your document says about forfeitures and administer the plan accordingly.
Too many sponsors barely know they have a forfeiture account, let alone how the document requires it to be used.
These lawsuits are another reminder that seemingly mundane plan administration can become expensive ERISA litigation.
Read the document. Follow the document.
It continues to be some of the cheapest fiduciary advice available.