Is It A Violation?



The use of plan forfeitures to offset employer contributions has been a longstanding practice of retirement plan fiduciaries. Nonetheless, new lawsuits are now alleging that this widespread practice is a violation of ERISA. Although defense experts doubt the practice will be deemed a violation, all eyes are on the outcomes.


Another Day, Another Lawsuit?

It does seem that way. While lawsuits against retirement plan fiduciaries are nothing new, Groom Law Group finds the recent claims “surprising given that the use of forfeitures to offset employer contributions is well established and widespread.” In fact, “the longstanding practice is explicitly permitted under Treasury regulations and is consistent with Department of Labor guidance.” As legal experts further explain, the new claims are quite disconcerting, offering a new example of how common practices are being challenged “in the context of a class action complaint”:


In both cases, the plans permitted the use of forfeitures for multiple purposes (e.g., paying administrative expenses and reducing future employer matching contributions).  The plaintiffs allege that the plan fiduciaries violated their duties under ERISA by using the forfeitures to offset the employers’ contribution obligation rather than some other purpose.  They claim this decision amounts to a decision to use the forfeitures for the benefit of the employer rather than solely in the interest of the participants and beneficiaries.  Plaintiffs further allege that the use of forfeitures resulted in prohibited transactions by effectively transferring property between the plans and the employers.   The plaintiffs seek the “restoration” to the plan of amounts used to offset employer contributions, disgorgement of the assets and profits made by the plan sponsors’ use of the money that would have been contributed, attorneys’ fees, and other equitable relief.


Almost All Plans…

According to experts at Plan Sponsor, the practice of using forfeitures to “reduce future employer contributions or to pay reasonable expenses” is permitted in “almost all defined contribution plans.”  Some plans  also permitallocating forfeitures among plan participants.” Though the Wagner Law Group is not involved in the recent cases, managing partner, Marcia Wagner is, like many attorneys, following this surprising litigation closely, and explains, “the only basis for a challenge would be if the use of the forfeitures to reduce employer contributions is inconsistent with ERISA’s exclusive benefit requirement. However…statutory language does not prohibit an employer from receiving some benefit from a transaction.” Wagner further observes:


For there to be a prohibited transaction under ERISA, the relevant plan fiduciary must know or should have known that the transaction was prohibited, and in view of this long-standing practice been approved by the IRS for inclusion in tax qualified plans, such an allegation would be implausible….From an ERISA fiduciary perspective, the language of a plan document must be followed unless it is improper, is inconsistent with the terms of the plan or violates ERISA.




Even frivolous allegations turn out to be costly and disruptive for plan sponsors. Protection is best practice and Colonial Surety makes it easy and affordable to obtain fiduciary liability insurance. Armed with our coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Conveniently, our Fiduciary With Cyber liability package is now available with a one year commitment. Protect yourself and your business, for a few dollars a day, now:


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New Frontiers?

Claims over use of plan forfeitures are not the only surprising cases on the ERISA class action front. Another new allegation that has been filed against retirement plan fiduciaries relates to the use of “out-of-date actuarial data to calculate pension benefits for participants and beneficiaries….” Specifically, one of the new claims states: “By using outdated mortality tables to calculate joint and survivor annuities and preretirement survivor annuities,” the company “harmed the financial security of its former employees and their loved ones, to its financial gain….” A claim, made in the U.S. District Court for the Eastern District of Michigan, includes “four counts of alleged fiduciary breach against each pension plan defendant.”  

As new claims continue to pop up, national risk management leaders caution plan sponsors: “Entrepreneurial-minded attorneys are flocking to uncover breaches of fiduciaries’ ERISA duty….Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits.” Even when solid procedures, paid experts, and great diligence are in play, oversights can happen and ending up in court is a real possibility. ERISA law experts urge plan sponsors to be on the alert for copycat cases. Remember too: the best offense is defense. Yours is just a few clicks away:


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