Another week, another Adams v. Goliath story in the world of ERISA litigation\u2014and this time, Goliath is Cigna. The company is now facing its second lawsuit in as many months over how it handled forfeitures in its $13 billion 401(k) plan. If you\u2019re a fiduciary\u2014or advise one\u2014pay attention. These cases may seem like d\u00e9j\u00e0 vu, but they\u2019re sending a very loud and clear message: the era of sloppy fiduciary oversight is over.<\/p>\n
Let\u2019s break this one down.<\/p>\n
Three former Cigna employees are alleging that the company misused over $17 million in forfeited 401(k) assets to offset its own matching contribution obligations. The plaintiffs claim this violated ERISA\u2019s fiduciary duties and self-dealing prohibitions. Their logic? Once the money leaves a non-vested employee\u2019s account and hits the plan\u2019s forfeiture bucket, it becomes plan money, and should be used for plan purposes\u2014like paying for administrative expenses or reallocating to participants\u2014not for helping the company\u2019s bottom line.<\/p>\n
Cigna, of course, disagrees. They\u2019ve said they\u2019ll \u201cdefend the company vigorously,\u201d which is corporate PR speak for \u201cthis is going to be expensive.\u201d<\/p>\n
But here\u2019s the kicker: the IRS has said that using forfeitures to reduce employer contributions is legal, within certain limits. In fact, that was reaffirmed in 2023. So why all the lawsuits? Because legality under the Tax Code isn\u2019t the same thing as prudence under ERISA\u2019s fiduciary standards. If a plan document says forfeitures should be used a certain way, or if the fiduciaries never even considered using them to reduce fees for participants, then they\u2019re vulnerable\u2014no matter what the IRS says.<\/p>\n
Let\u2019s not forget: this is the second lawsuit Cigna has faced recently. The other alleges they kept participant assets in underperforming stable value options and again misused forfeitures. Where there\u2019s smoke, there\u2019s often a fiduciary committee that hasn\u2019t read its plan document in a while.<\/p>\n
A few takeaways for plan sponsors and advisors:<\/p>\n
1. Forfeitures are not free money. They\u2019re plan assets. Treat them with the same care as participant contributions.<\/p>\n
2. Document your decision-making. If you\u2019re using forfeitures to offset contributions, make sure the plan permits it, and document why you chose that route over other alternatives.<\/p>\n
3. Read your plan document. I shouldn\u2019t have to say this, but clearly, some committees aren\u2019t doing it.<\/p>\n
4. Benchmark everything. Fees, investments, processes\u2014even how you handle forfeitures.<\/p>\n
With over 93,000 participants and $13 billion in plan assets, Cigna\u2019s plan isn\u2019t just a retirement vehicle\u2014it\u2019s a litigation magnet. But the lessons apply just as well to the $10 million plan down the street. ERISA doesn\u2019t care about your size\u2014it cares about your process.<\/p>\n
And if your process stinks? The plaintiffs\u2019 bar is more than happy to help you improve it\u2014at a steep cost.<\/p>\n
As always, don\u2019t let litigation be your wake-up call. Be proactive. Be prudent. Be a fiduciary.<\/p>\n
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