The past year has seen a surge in class action lawsuits against some of the largest employers in the country, alleging that fiduciaries are breaching their duties in deciding how to allocate forfeitures. While these claims are not necessarily valid, it may be prudent to take a moment during your next benefits committee meeting to review what your plan document requires, assess what your plan is currently doing, and determine whether any changes are necessary.

Before this recent litigation, the issue of forfeitures appeared to be well settled. Participants in a 401(k) or similar defined contribution plan are always fully vested in their own contributions. However, many plans impose a vesting period before participants become fully vested in employer contributions (such as matching contributions). If a participant leaves the company before completing the vesting period, the employer contributions are forfeited. According to the IRS, these forfeited amounts can be used by the plan sponsor to offset plan expenses or reduce employer contributions. Consequently, many plan documents allow both uses of forfeitures and leave the decision to plan fiduciaries.

In these class action lawsuits, plaintiffs allege that using forfeitures to reduce employer contributions, though permitted by the IRS under the Tax Code, violates ERISA’s fiduciary duties, which are administered by the Department of Labor (DOL). Plaintiffs argue that forfeitures are plan assets and, as such, may only be used to pay benefits or the reasonable expenses of the plan. They further contend that ERISA’s duty of loyalty requires fiduciaries to prioritize participants’ interests over those of the plan sponsor. Specifically, the lawsuits claim that using forfeitures to reduce employer contributions rather than to offset participant-borne plan expenses constitutes a fiduciary breach.

It is important to note that these cases are in their early stages, that the legal theories involved are novel, and that the DOL has never taken the position that using forfeitures to reduce employer contributions is a fiduciary breach. Nevertheless, given the current controversy, plan fiduciaries may benefit from reassessing their approach to forfeitures by addressing three key questions.

1. What does your current plan document provide?

Plan documents often take different approaches to forfeitures. Some mandate a single use, while others specify an order of priority for different uses or allow multiple uses at the fiduciaries’ discretion. Fiduciaries should be familiar with the requirements of their specific plan document.

2. What is your plan actually doing?

Fiduciaries are obligated to follow the terms of the plan document. For example, if the document requires forfeitures to be used to offset plan expenses, using them to reduce employer contributions would constitute a breach of duty, and vice versa. Unlike the recent lawsuits, the duty to adhere to plan terms is a well-established legal principle that the DOL has enforced in the past. Fiduciaries should ensure their practices align with their plan document and consult legal counsel if any discrepancies are identified.

3. Does your current plan language reflect your intentions?

In light of recent litigation, it is worth considering whether the current plan language aligns with your goals. Do you want fiduciaries to have discretion, or should the plan document provide clear direction? For instance, if the plan document specifies that forfeitures will be used to reduce employer contributions, fiduciaries must follow that directive unless it is determined to be unlawful. Clear guidance in the plan document may shift the decision from a fiduciary responsibility to a “settlor” decision by the plan sponsor, reducing fiduciary discretion and potential liability.

There are several approaches to handling forfeitures, and fiduciaries should consult with legal counsel to evaluate the specifics of their plan and circumstances. However, taking the time to review your plan’s current practices is a straightforward and valuable step and a sensible addition to your 2025 fiduciary checklist.