ERISA forfeiture class action litigation has continued to see various developments and potential new theories emerging in 2025. As Carlton Fields has previously reported, starting in late 2023, a new trend of lawsuits emerged challenging the use of forfeiture dollars in retirement plans. Various federal district courts have recently issued conflicting decisions and, notably, three dismissed cases are on appeal to the Ninth
Circuit — Hutchins v. HP Inc., Sievert v. Knight-Swift Transportation Holdings Inc., and Wright v. JP Morgan Chase & Co. The Ninth Circuit will be the first federal circuit court to weigh in on these forfeiture issues.
While many of these forfeiture-based class actions have been dismissed, the U.S. District Court for the Central District of Illinois in Buescher v. North American Lighting Inc. recently denied the defendants’ motion to dismiss with respect to the plaintiff’s forfeiture-related claims for breach of fiduciary duties of loyalty and prudence, prohibited transactions, and breach of the duty to monitor. In Buescher, the plaintiff claimed that the defendants improperly allocated forfeitures under the 401(k) plan for their own benefit when they decided to use forfeitures to offset nonelective contributions instead of using them to pay plan expenses. The plaintiff alleged that the 401(k) plan committee breached its fiduciary duty of prudence by (1) using an imprudent and flawed process to determine how forfeitures would be allocated and (2) failing to exhaust forfeitures by year’s end, as instructed by the IRS. In their motion to dismiss, the defendants argued, in part, that the 401(k) plan permitted the allocation of forfeitures to offset employer contributions and that such allocations were permitted by both ERISA and the tax code.
When evaluating the plaintiff’s imprudent process claim, the court rejected the defendants’ contention that the plaintiff’s claims were conclusory and lacking specific facts. The plaintiff alleged that the plan committee had failed to investigate whether the defendant was at risk of defaulting on its obligations or whether some forfeiture funds would be left over even after covering plan expenses. The plaintiff also alleged that the committee did not consult with a nonconflicted decision-maker before making its allocation determination. Further, the court noted that the defendants misunderstood and/or mischaracterized the plaintiff’s claims when arguing that the plaintiff’s theory of imprudence was reliant on the “faulty assumption that allocation of forfeitures to employer contributions is per se imprudent such that any process reaching that result is imprudent.” The court stated that the plaintiff had alleged that the proper allocation of forfeitures was a context-dependent inquiry and that allocation toward offsetting employer contributions may at least sometimes be in the best interests of participants. Ultimately, the court denied the defendants’ motion to dismiss with respect to the breach of the fiduciary duty of prudence based on plausible allegations that they employed an imprudent decision-making process.
The plaintiff in Buescher also came forward with a new forfeiture-based theory: forfeiture exhaustion. The plaintiff alleged that several financial statements showed a year-end balance in the forfeiture account, which he claimed violated IRS and Treasury regulations. In support, he cited IRS Publication 4278-B (2010), which stated that forfeitures were required to be used or allocated in the same plan year they were incurred. The publication further explained that the Internal Revenue Code “does not authorize forfeiture suspense accounts to hold unallocated monies beyond the plan year in which they arise” and “[a] plan’s failure to use forfeitures in a timely manner denies plan participants additional benefits or reduced plan expenses.” The defendants argued that the plaintiff had failed to explain how ERISA provided a cause of action to pursue alleged violations of the Internal Revenue Code, revenue rulings, or regulations. The court, however, was not convinced, stating that the plaintiff was not relying on the IRS publication for its force of law and that the failure to use forfeitures in a timely manner denied plan participants additional benefits or reduced plan expenses, which directly resulted in a claim for imprudence under 29 U.S.C. § 1104(a)(1)(B). Accordingly, the court denied the defendants’ motion to dismiss regarding their breach of the duty of prudence by failing to exhaust forfeitures.
Similarly, in March 2025, the Northern District of California denied the defendants’ motion to dismiss an ERISA forfeiture-related putative class action. In McManus v. Clorox Co., the plaintiff brought claims alleging breaches of the fiduciary duties of loyalty and prudence in connection with the Clorox 401(k) plan’s usage of forfeited funds to reduce employer contributions rather than pay plan expenses. In evaluating the duty of prudence claims, the court found that the plaintiff’s allegations that the defendants were motivated solely by their self-interest and conducted no reasoned and impartial decision-making process were plausible, given that no other justification was readily apparent. The court was also not persuaded by the defendants’ argument that the plan documents allowed for the practice of allocating forfeitures in such a way because “a fiduciary is not allowed to violate ERISA merely because language in a plan document allows it.”
Lastly, the plaintiff argued that, when a plan document gives a fiduciary the discretion to choose between using forfeitures to reduce employer contributions or pay plan expenses, and the plan document does not specify which allocation should take priority, defendants have a conflict of interest with the plan’s participants. When such a conflict is present, fiduciaries have a duty to investigate, confer with an impartial decision-maker, or decide in the interest of the plan participants. When evaluating this theory, the court found that the plaintiff’s allegations were sufficiently context-specific to survive a motion to dismiss because the defendants had enough information to know whether their fiduciary decision was prudent. Interestingly, in denying the motion to dismiss, the court in McManus stated: “This case presents a novel interpretation of ERISA on which there is no binding authority. Reasonable minds can differ, and several district courts do.”
While other courts have rejected this conflict-of-interest theory, namely Hutchins v. HP Inc., the success of McManus may persuade other plaintiffs to continue to assert it. Additionally, because the forfeiture exhaustion theory has now seen success with the survival of the plaintiff’s claims in Buescher, other plaintiffs may incorporate this theory into other ERISA class actions. District courts continue to issue conflicting decisions related to forfeiture litigation. As such, any guidance received from the Ninth Circuit in the cases on appeal will be significant to the development of these forfeiture-related cases.
