The DOL's Stance on 401(k) Forfeiture Lawsuits and Its Impact on Retirement Plan Sponsors

The U.S. Department of Labor's (DOL) recent interventions in 401(k) forfeiture lawsuits have reshaped the legal and financial landscape for institutional investors and retirement plan sponsors. By affirming the use of forfeited employer contributions to offset future contributions rather than pay plan expenses, the DOL has reinforced a settlor-centric interpretation of ERISA, reducing fiduciary liability while prompting institutional investors to recalibrate their risk mitigation and long-term planning strategies. This analysis examines the implications of these rulings and the evolving strategies adopted by market participants.

The DOL's Legal Stance: A Settlor-Centric Framework

The DOL's 2025 guidance, exemplified by its amicus brief in Wright v. JPMorgan Chase & Co., underscores a clear position: the allocation of forfeitures is governed by the plan's design, not fiduciary discretion. In this case, the DOL argued that fiduciaries' use of forfeited funds aligned with the plan document's terms, dismissing plaintiffs' "bare allegations" of imprudence as legally insufficient. This stance was echoed in Hutchins v. HP Inc., where the DOL reiterated that settlor discretion-determined at plan inception-validates the use of forfeitures to reduce employer contributions.

Courts have largely concurred. Judge Josephine L. Staton's June 2025 ruling in the JPMorgan case affirmed that such practices do not constitute a breach of fiduciary duty. These rulings reflect a broader judicial trend favoring employers, emphasizing that ERISA's fiduciary standards do not extend to decisions explicitly outlined in plan documents. For institutional investors, this clarity reduces the risk of litigation over forfeiture allocation, provided their plans are structured to codify these choices.

Legal Risk Mitigation: Documentation and Compliance

Despite the DOL's support, institutional investors must remain vigilant. Over 80 forfeiture-related lawsuits emerged in 2025, with mixed judicial outcomes depending on jurisdiction. To mitigate risks, plan sponsors are advised to:
1. Review Plan Documents: Ensure forfeiture usage aligns with both the plan's language and regulatory frameworks. Ambiguities in plan design could still invite legal challenges.
2. Inventory and Allocate Forfeitures Proactively: The Treasury's 2023 proposed regulations mandated a December 31, 2025, deadline for allocating forfeitures, prompting sponsors to adopt systematic strategies.
3. Document Fiduciary Processes: Rigorous documentation of fee reviews, investment decisions, and forfeiture allocations is critical to demonstrating compliance with ERISA's prudence standard.

These steps not only align with the DOL's settlor-centric framework but also preemptively address potential litigation by embedding transparency into plan governance.

Long-Term Financial Strategy: Flexibility and Innovation

The DOL's 2025 rulings have also influenced institutional investors' long-term planning. By affirming the legitimacy of settlor discretion, the DOL has indirectly encouraged plan sponsors to innovate in retirement plan design. For instance, the Trump administration's August 2025 executive order promoting alternative assets-such as private equity and cryptocurrencies-in 401(k) plans has gained renewed traction. The DOL's rescinding of prior cautionary guidance on cryptocurrencies further signals a regulatory shift toward flexibility, allowing sponsors to explore diversified investment options while adhering to fiduciary standards.

This regulatory environment necessitates a dual focus:
- Plan Design: Sponsors must ensure that alternative asset allocations are explicitly permitted in plan documents, mirroring the DOL's emphasis on settlor discretion.
- Fiduciary Prudence: While discretion is expanded, prudent decision-making remains paramount. Institutional investors must balance innovation with rigorous due diligence to avoid reputational or legal risks.

Conclusion: Balancing Clarity and Vigilance

The DOL's 2025 rulings have provided much-needed clarity for retirement plan sponsors, reducing litigation risks by anchoring forfeiture practices in plan design. However, this clarity does not eliminate the need for proactive governance. Institutional investors must continue to refine their strategies, ensuring that plan documents are unambiguous, processes are well-documented, and long-term innovations align with both regulatory expectations and participant interests. As the legal and regulatory landscape evolves, the interplay between settlor discretion and fiduciary responsibility will remain a defining challenge for institutional investors in the retirement space.