PUB  Another 401k Plan Sponsor Faces Novel Suit

Another 401(k) Plan Sponsor Faces Novel Suit Regarding its Use of Forfeiture Funds

The Employee Retirement Income Security Act ("ERISA") plaintiffs' bar has found a new way to allege that 401(k) plan sponsors have breached their fiduciary duty.

This latest suit alleges that the plan sponsor failed to use forfeiture funds to lessen plan administrative expenses, which would have reduced or eliminated the amounts charged to the accounts of plan participants for administrative expenses. This, the complaint alleges, constitutes a violation of ERISA's: (i) fiduciary duty; (ii) anti-inurement; and (iii) prohibited transaction provisions. See Yagy v. Tetra Tech, Inc., Case No. 2:24-cv-01394, (C.D. Cal. Feb. 21, 2024).

This is the seventh lawsuit filed against a plan sponsor, all filed by the same plaintiffs' firm in federal district courts throughout California. In some of the prior lawsuits, plaintiffs have alleged that the governing plan documents explicitly provided that plan sponsors could use forfeitures to lower contributions owed to the plans. The Tetra complaint is devoid of such allegations. 

To be clear, this is a novel theory and it must overcome an Internal Revenue Service ("IRS") regulation that allows plan sponsor's discretion to use forfeiture funds exactly how the plaintiffs have alleged that defendant plan sponsors have used them. And there is no specific Department of Labor ("DOL") guidance, outside of an enforcement action it brought against a plan sponsor, where DOL argued that the governing plan document required forfeiture funds to be used to pay plan expenses.

Motions to dismiss have been filed in at least five of these cases, generally raising defenses concerning: (i) fiduciary status; (ii) standing; (iii) governing IRS regulation; and (iv) the plan document rule.

The viability of these cases has not been determined. Until decisions have been reached in these cases, plan sponsors should continue to operate the plan in accordance with the plan documents and IRS guidance when determining the appropriate use of forfeiture funds.

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