Who should get the money when participants forfeit employer contributions?
San Diego, CAOn September 24, the Southern District of California granted Thermo Fisher Scientific Inc.’s motion to dismiss Konstantina Dimou’s ERISA lawsuit. Dimou v. Thermo Fisher Scientific claims that forfeited contributions should have been used to pay the administrative expenses of the Thermo Fisher Scientific Inc. 401(k) Retirement Plan rather than to offset required employer contributions. The financial difference can be significant.
A choice to use the forfeited amounts to pay expenses would have directly benefitted participants. The decision to use forfeited contributions to offset otherwise required employer contributions benefits the plan sponsor.
This decision, Dimou alleges, amounts to a breach of the plan sponsor’s ERISA fiduciary duty to act for the exclusive benefit of plan participants and beneficiaries. This is not necessarily the end of the line for Dimou, as Judge Todd Robinson has granted the plaintiff leave to amend his complaint to allege more specific facts.
Thermo Fisher’s actions consistent with practice and guidance
The plaintiff alleged that from 2017 to 2022, the defendants used forfeitures exclusively to offset the company’s contributions. Dimou first filed his class action lawsuit in September 2023. In December 2023, he amended his complaint to seek plan-wide relief as a representative of the plan itself. Thermo Fisher filed a motion to dismiss. In September 2024, U.S. District Judge Todd W. Robinson granted the motion, but gave Dimou 30 days to amend his complaint.
Judge Robinson found that the plan's documents allow the plan sponsor to reduce its contributions to the plan or to pay plan expenses. Further, he noted that Thermo Fisher's practice is consistent with IRS and DOL guidance.
Dueling laws
Under Section 404 of ERISA, one of the duties of a plan fiduciary is to “act ‘solely in the interest of the participants’ and for the ‘exclusive purpose’ of providing benefits to those participants.” This general principle also implies that the assets of a pension plan may never inure to the benefit of the employer.
Nonetheless, the Department of Treasury has proposed explicit guidance that a defined contribution pension plan may use forfeited funds to reduce an employer’s future contributions.
There is arguably a difference between these two rules.
Chaos in California
In May, a different court in the Southern District of California denied Qualcomm Inc.’s motion to dismiss a class action 401k lawsuit brought by participants in the Qualcomm Incorporated Employee Savings and Retirement Plan. The plaintiffs in Qualcomm made an argument that was very similar to the argument advanced in Dimou. The court found that the Qualcomm plaintiffs had made a sufficient showing to get at least to the discovery phase of the litigation.
It should be noted that at the summary judgment phase of litigation, a plaintiff need not conclusively prove an allegation. It is enough that the allegation is legally plausible. In Qualcomm, the District Court found that the plaintiffs had met this minimal burden. In Dimou, another court in the same district found that the plaintiffs had not. It may be, as Judge Robinson’s order suggests, that the plaintiffs simply need to develop their factual background further.
On June 17, 2024, the U.S. District Court for the Northern District of California granted a motion to dismiss a class action lawsuit that alleged ERISA violations against HP, Inc. for using forfeited employer contributions to reduce its contributions rather than to pay plan administrative costs. As in Dimou, however, because the court granted the plaintiff leave to amend the complaint on all counts.
On the other hand, in Rodriguez v. Intuit, Inc., the Northern District of California denied Intuit’s motion to dismiss, finding the plaintiff had sufficiently pled her fiduciary breach, anti-inurement, and prohibited transaction claims and that the plan "as a whole was damaged."
In August, 401k plan participants filed a similar lawsuit in the Central District of California. Becerra v. Bank of America Corp similarly alleges that Bank of America violated ERISA by improperly using forfeiture amounts to benefit itself (by reducing employer contributions) rather than for the benefit of participants (by reducing plan expenses).
In October 2023, participants in the Clorox Co. 401k Plan filed a fiduciary breach lawsuit in the Northern District of California. McManus v. Clorox Co. alleges that from 2017 to 2022, company nonelective contributions to the plan were reduced by a total of $5.7 million as a result of Clorox’s reallocation of forfeited funds.
What’s going on here?
On one hand, plan sponsors may see themselves as the targets of a particularly enterprising law firm that represents most of the plaintiffs in this case. On the other, these ERISA lawsuits may be understood as an effort to rectify a widespread violation of plan fiduciaries’ basic duty to safeguard workers retirement savings for them.
In any event, the legal conflict cries for resolution.
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