ERISA Forfeiture Lawsuits Face Increasing Scrutiny, Though Providence Settlement Stands Out
– A wave of litigation challenging how 401(k) and 403(b) plan sponsors handle forfeited funds is entering a critical phase, with court decisions beginning to lean toward employers, despite a recent significant settlement.
Since , approximately 60 class action lawsuits have been filed, alleging that the practice of using plan forfeitures to offset employer contributions violates the Employee Retirement Income Security Act (ERISA). Plaintiffs argue this practice constitutes a breach of fiduciary duties, a prohibited transaction, and a violation of ERISA’s anti-inurement clause.
The legal landscape remains unsettled, with dozens of motions to dismiss still pending and two appeals awaiting decisions in the Ninth Circuit. However, a recent amicus brief filed by the U.S. Department of Labor (DOL) in the Ninth Circuit, urging the court to affirm the dismissal of a forfeiture lawsuit against HP Inc. For failure to state a claim, signals a potential shift in momentum.
According to data compiled by Mayer Brown, of 15 forfeiture cases where district courts have issued substantive rulings on motions to dismiss, 11 motions were granted (six with prejudice) and only four were denied. Three of the dismissed cases are currently on appeal in the Ninth Circuit – involving HP Inc., Knight-Swift Transportation, and JPMorgan.
While dismissals are becoming more common, settlements remain rare. A notable exception is the recent agreement reached with Providence Health & Services for $42.7 million. This settlement stands out as a significant outcome in a field where resolutions have been infrequent.
The surge in these types of lawsuits began in , with Holland & Knight reporting more than 30 class action complaints filed alleging improper use of 401(k) forfeitures. Goodwin Law notes that 2024 saw a 35% increase in ERISA excessive fee class action litigation, with forfeiture claims contributing to the rise in overall ERISA litigation.
The increase in ERISA litigation isn’t limited to forfeiture claims. Excessive fee litigation also spiked in 2024 to a near-record pace, indicating a broader trend of increased scrutiny of retirement plan practices. Plaintiffs’ firms are also actively attempting to add forfeiture claims to existing excessive fee lawsuits, broadening the scope of the legal challenges.
The DOL’s recent involvement, through its amicus brief, could encourage other courts to dismiss similar forfeiture lawsuits. However, the outcome of the pending appeals in the Ninth Circuit will be crucial in shaping the future of these cases and determining the extent to which plan sponsors can continue to use forfeitures to offset contributions.
