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.
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 Hutchins v. HP Inc. a California district court dismissed the forfeiture claim against HP, calling it “implausible.” The court noted that HP’s 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 July 9 2025 the Department of Labor filed an amicus brief siding with HP. It opened by reminding the court that for “several decades … defined‑contribution 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 sponsor‑fiduciary disputes—hardly a win for employees.
Is the DOL’s weight on these matters different now?
Last year’s Supreme Court Loper Bright 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 helpful—but 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 Castillon v. Aldi Inc. Rather than re‑litigating 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 $6 million left in suspense at year‑end.
Why could that matter? Many sponsors fund last year’s employer contribution well into the following year—sometimes right before the September 15 extended Form 5500 deadline. A plan that now requires all forfeitures to offset that employer contribution may still hold dollars from mid‑September to December 31. Under the new “use‑it‑promptly” 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 single‑use 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 year‑end sweep—pay fees or credit participants—to clear any dollars that appear between mid‑September and December 31. 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.
