For years, forfeitures were treated like found money in 401(k) plans. Someone leaves before vesting, the plan keeps the unvested employer contribution, and no one loses sleep.<\/p>\n
Then came the lawsuits.<\/p>\n
Plaintiffs have begun challenging how forfeitures are used\u2014particularly when they\u2019re applied to offset employer contributions instead of paying plan expenses. Suddenly, something that felt routine is being reframed as a fiduciary breach.<\/p>\n
Here\u2019s the reality: forfeitures are not inherently bad. ERISA permits them. The IRS permits them. Most plans are designed to use them. But how you use them\u2014and how well your plan documents support that use\u2014matters.<\/p>\n
The fiduciary risk isn\u2019t in having forfeitures. It\u2019s in:<\/p>\n
\u00b7 Ignoring plan language<\/p>\n
\u00b7 Failing to apply forfeitures consistently<\/p>\n
\u00b7 Letting forfeitures accumulate without a clear purpose<\/p>\n
\u00b7 Never revisiting the decision<\/p>\n
If forfeitures reduce employer contributions, sponsors should be prepared to explain why that approach makes sense for participants and the plan as a whole. If they pay expenses, sponsors should ensure that\u2019s clearly authorized and properly documented.<\/p>\n
This isn\u2019t about panic. It\u2019s about attention.<\/p>\n
Forfeitures are a perfect example of an ERISA truth: permitted does not mean protected. Protection comes from clarity, consistency, and documentation.<\/p>\n
In today\u2019s litigation environment, anything that quietly benefits the employer deserves a second look\u2014not because it\u2019s wrong, but because it needs to be defensible.<\/p>\n
Free money has strings attached. Fiduciaries ignore them at their peril.<\/p>\n
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