401(k) Forfeitures: A Fiduciary Minefield for Employers

Introduction

The recent surge in fiduciary breach class action lawsuits alleging misuse of 401(k) forfeitures has sent shockwaves through the employer community.

This article provides a comprehensive guide to the legal and regulatory landscape surrounding 401(k) forfeitures, empowering employers to navigate this complex area and mitigate potential risks.

What are 401(k) Forfeitures?

401(k) forfeitures occur when an employee leaves their job before becoming fully vested in their employer's contributions to their 401(k) plan.

These forfeited funds revert back to the plan and can be used for various purposes, including:

• Offsetting administrative expenses
• Distributing to remaining plan participants
• Recovering plan losses

Fiduciary Duties and Forfeitures

As fiduciaries, plan sponsors and administrators have a legal obligation to act in the best interests of plan participants.

This includes ensuring that forfeitures are handled in a manner that meets the following requirements:

• Prudent: Forfeitures must be used in a manner that benefits the plan as a whole.
• Exclusive Benefit: Forfeitures must only be used for the exclusive benefit of plan participants.
• Sole Benefit: Employers cannot use forfeitures to offset their own costs or benefit from them in any way.

Case Law and Enforcement

The Department of Labor (DOL) has taken an active role in enforcing fiduciary duties with respect to 401(k) forfeitures.

In recent years, numerous class action lawsuits have been filed against employers, alleging misuse of forfeitures.

These lawsuits have resulted in significant settlements and fines, demonstrating the potential consequences of fiduciary breaches in this area.

Best Practices for Employers

To minimize the risk of fiduciary liability, employers should adopt the following best practices:

• Review Plan Documents: Ensure that plan documents clearly outline the procedures for handling forfeitures.
• Establish Clear Policies: Develop written policies and procedures for the use of forfeitures.
• Document Decisions: Document all decisions related to the use of forfeitures, including the rationale behind those decisions.
• Consider Independent Review: Seek independent legal or financial advice to ensure that forfeiture practices are prudent and compliant.

Conclusion

401(k) forfeitures present a potential fiduciary minefield for employers.

By understanding the legal requirements and adopting sound best practices, employers can mitigate the risk of liability and ensure that forfeitures are used in a manner that benefits plan participants.