The Hottest 401(k) Litigation Trend’s New Angle

Neil Plein, CPFA™, AIF®, Lead Retirement Plan Consultant

For the past two years, plaintiffs’ attorneys have homed in on forfeitures—the unvested employer contributions (i.e. match, profit sharing) in a retirement plan, that stay behind when employees leave prior to becoming fully vested. To date, more than 65 class action lawsuits have been filed arguing that using forfeitures to offset future employer contributions –the most common practice constitutes a fiduciary breach. To date, more than 65 class action lawsuits have been filed arguing that using forfeitures to offset future employer contributions, (the most common practice, ) constitutes a fiduciary breach.

Crux of the issue

Most retirement plans allow forfeitures to be used in three ways:  

1. reduce employer contributions,  

2. pay plan expenses or  

3. distribute the funds to participant accounts;  

This gives those managing the plan a discretionary choice about how to use the forfeited funds. Historically, that choice has been considered a “settlor” function (a plan design decision), not an fiduciary act. If it were a fiduciary act, it would obligate the decision to be made exclusively in the best interest of participants. Plaintiffs argue that the choice is fiduciary in nature, so reducing the cost of the employer contribution for the company, is not the choice that is in the best interest of participants and therefore, a fiduciary breach, violating the duty of loyalty.  

Current Best Practice: Remove Choice

The best practice that has emerged to combat this risk is simple, remove the element of choice. For example, if the plan always uses forfeitures to reduce employer contributions, amend the plan document so that this is the only option available for using forfeiture funds. No choice, no risk 

HP case tests keeping choice

In Hutchinsv.HPInc. a California district court dismissed the forfeiture claim against HP, calling it implausible. The court noted that HPs plan explicitly allowed forfeitures to reduce contributions or pay expenses (i.e. choice) and that ERISA does not force fiduciaries to choose fees over benefits in every circumstance. HP has prevailed twice; now the case is before the Ninth Circuit Court of Appeals, where an interesting twist emerged. 

DOL doubled down on that view

In a fairly surprising move, on July92025 the Department of Labor filed an amicus brief siding with HP. It opened by reminding the court that for “several decades … definedcontribution plans may allocate forfeited employer contributions to pay benefits for remaining participants rather than using those funds to defray administrative expenses.” Most interestingly, was this specific line: 

“A fiduciary’s use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA. 

The brief draws a bright line: follow the document and you are not disloyal—even if the choice lightens the company’s cash outlay. The DOL also warned that forcing committees to divert forfeitures to fees could delay participants’ employer contribution and spark costly sponsorfiduciary disputes—hardly a win for employees. 

Is the DOL’s weight on these matters different now?

Last year’s Supreme Court LoperBright decision scaled back the old Chevron deference doctrine, meaning courts no longer treat agency (DOL) interpretations as presumptively correct. In other words, The DOL says so is helpfulbut no longer the trump card it once was. That makes the landscape grayer and leaves room for creative new claims. 

Plaintiffs pivot to timeliness

Enter Castillonv.AldiInc. Rather than relitigating how forfeitures were used, the complaint says Aldi breached its duty by not spending them fast enough. Citing 2010 IRS guidance that forfeitures should be used in the plan year they arise, plaintiffs point to roughly $6million left in suspense at yearend. 

Why could that matter? Many sponsors fund last year’s employer contribution well into the following year—sometimes right before the September15 extended Form5500 deadline. A plan that now requires all forfeitures to offset that employer contribution may still hold dollars from midSeptember to December31. Under the new “useitpromptly” theory, that gap—not the choice of use—could become the litigation next target. 

New evolving best practice: Allow choice again?

The “remove choice” best practice may be close to running its course.If courts keep blessing the use of forfeitures to offset the employer contribution, that strategy should remain sound—but sponsors may also need to begin planning for the timing risk.Because fresh forfeitures can surface after the annual employer contribution is funded, a rigid singleuse rule may leave money stranded and potentially opens the door to new lawsuits (especially if the dollar values are high).A more resilient approach may be to keep the employer contribution offset as the primary use, then allow a yearend sweep—pay fees or credit participants—to clear any dollars that appear between midSeptember and December31.Building that flexibility into both the document and the retirement committee calendar enables fiduciaries to serve participants, adapt to evolving legal claims, and stay one step ahead of the plaintiffs’ bar.  

Disclosure: This content is for informational purposes only and not investment advice. 

Meet the Author
Lead Retirement Plan Consultant

Neil Plein, CPFA, AIF®

Aldrich Wealth LP

Neil is a Certified Plan Fiduciary Advisor (CPFATM) and Accredited Investment Fiduciary (AIF®) who acts as the quarterback of a retirement plan. He guides employers through the overall plan management with the knowledge to do a deep dive into any aspect of plan operation. Neil connects the dots between internal staff and external service providers… Read more Neil Plein, CPFA, AIF®

Neil's Specialization
  • Corporate retirement plans
  • Recordkeeper selection
  • Strategic planning and consultation
  • One-to-one consulting participant meetings
  • Certified Plan Fiduciary Advisor (CPFATM)
  • Accredited Investment Fiduciary (AIF®)
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