In a string of recent legal challenges, four prominent corporations have faced allegations that their management of 401(k) plans breaches ERISA guidelines, prioritizing employer interests over participant rights.
These cases, initiated in California federal courts between September 19 and October 18, scrutinize the handling of employee departures prior to the completion of their company contribution vesting periods. Each lawsuit, spearheaded by a plan participant, seeks class-action status, potentially reshaping the landscape of 401(k) plan administration.
At the crux of these lawsuits is a confrontation between IRS regulations and ERISA mandates. IRS rules permit defined contribution plans to utilize forfeiture funds either to offset plan expenses or reduce employer contributions. The lawsuits argue that the latter contravenes ERISA's loyalty obligation, which mandates that participant benefits should not be subordinated to the interests of the plan.
Further, these legal actions accuse the companies and their fiduciaries of breaching ERISA's prudence duty, citing a failure to minimize administrative costs. They also allege violations of ERISA's standards on prohibited transactions, accusing defendants of managing plan assets for their own interests.
These cases delve into the intricacies of 401(k) contributions and vesting. While departing participants retain their personal contributions, the remainder of company contributions is forfeited based on the plan's specific rules. This includes both non-elective corporate contributions and company matching payments.
Although the lawsuits recognize that using forfeited accounts to reduce corporate plan contributions is legally permissible, they criticize this practice as being primarily in the companies' interest, at the expense of plan participants and their benefits.
For instance, the lawsuit against Clorox, filed on October 18, condemns the company's decision to lower its contributions instead of reducing plan expenses, alleging this was done solely for Clorox's benefit, to the detriment of plan participants. Similar language and allegations are echoed in the lawsuits against Intuit, Thermo Fisher Scientific, and Qualcomm, revealing a pattern of concern across different corporate 401(k) plans.
The vesting schedules vary among these companies, with Thermo Fisher Scientific requiring two years for corporate match vesting, while Qualcomm has a 50% vesting on the first anniversary and full vesting by the second. Intuit’s plan stipulates a gradual vesting period based on the employee's hire date, and Clorox applies a five-year variable vesting schedule for non-elective contributions.
The legal representatives for the plaintiffs, Matthew B. Hayes and Kye D. Pawlenko of Hayes Pawlenko LLP, have not commented on these proceedings. In response, a Clorox spokesperson asserted the company's belief that the claims are baseless and confirmed their intent to contest them. Similarly, Qualcomm and Thermo Fisher Scientific have not commented, while an Intuit representative mentioned that the company is reviewing the matter and takes pride in offering comprehensive benefits to its employees.
A similar lawsuit was filed against HP Inc. on November 14, alleging comparable misuse of forfeiture practices in their 401(k) plan. The claim highlights a three-year cliff vesting schedule for company matches, after which participants are fully vested.
The retirement industry has reacted with surprise to these lawsuits, given the historical flexibility in handling forfeited nonvested accounts. Daniel Aronowitz of Euclid Fiduciary criticized these legal actions as lawyer-driven and lacking merit. Jennifer Eller of Groom Law Group, representing sponsors in ERISA cases, views the litigation as opportunistic, highlighting the unpredictability of such legal battles.
The industry's approach to these lawsuits will likely be influenced by ERISA attorneys and consultants, according to Robert Richter of the American Retirement Association. He suggests that while IRS rules and many sponsors' plan documents offer flexibility, explicit language in plan documents might be a solution for those wishing to reduce employer contributions. These cases, thus, present a potential concern for plans offering fiduciaries flexibility in the usage of forfeited nonvested accounts.
