Structural Shift in 401(k) Fiduciary Risk: The DOL's Defense of a Decades-Old Practice

The legal landscape for retirement plan sponsors has been upended by a wave of novel litigation. Since September 2023, ERISA plaintiff's firms have filed approximately 60 class action lawsuits challenging the longstanding practice of using plan forfeitures to offset employer contributions. The core allegation is that this common practice breaches fiduciary duties and violates ERISA's anti-inurement clause. For a time, the judiciary appeared skeptical of this new theory. In a landmark early decision, the district court in Hutchins v. HP Inc. dismissed the claims with prejudice, ruling the plaintiff's theory was implausible and overly broad.

Yet a critical regulatory pivot is now reshaping the battlefield. In a decisive move, the Department of Labor has stepped into the fray as an ally for plan fiduciaries. Last July, the DOL filed an amicus brief in the Ninth Circuit appeal of the HP case, explicitly arguing that a fiduciary's use of forfeited funds to offset contributions would not violate ERISA. This was not a one-off intervention. The agency has since filed a similar brief in the J.P. Morgan Chase case and has requested additional time to file in another forfeiture suit involving Honeywell International. This consistent, high-level advocacy represents a stark shift from initial judicial skepticism and signals a potential turning point for the litigation wave.

The Fiduciary Mechanism: Prudence, Loyalty, and Plan Design

The legal battle over plan forfeitures hinges on a classic tension in ERISA: the scope of a fiduciary's duties versus the plan sponsor's authority. Plaintiffs allege that using forfeited funds to offset employer contributions breaches two core fiduciary duties. First, they claim it violates the fiduciary duties of prudence and loyalty. Second, they argue it constitutes a prohibited transaction that inures plan assets to the sponsor's benefit, directly contravening ERISA's anti-inurement clause. The theory is that by reducing their own contribution obligation, sponsors capture a financial benefit at the expense of participants.

The key defense, however, is not a legal technicality but a matter of clear plan design. The Department of Labor's amicus brief in the HP case underscores that the plan document itself provides the legal basis. The HP plan explicitly states that forfeitures "may be used to reduce employer contributions, to restore benefits previously forfeited, to pay Plan expenses, or for any other permitted use." This language grants the fiduciary committee a range of options. The DOL argues that when a plan document offers such flexibility, the fiduciary's choice to use forfeitures for one permitted purpose-offsetting contributions-cannot be deemed a breach of duty. The decision is framed as a prudent allocation of assets within a defined set of permissible uses.

This defense gains structural weight from a pivotal Supreme Court precedent. In Thole v. U.S. Bank, the Court reinforced that fiduciaries are not required to act to maximize participant benefit at all costs. Their duty is to act in the interest of participants, but they are not insurers of plan outcomes. This principle is critical here. The DOL's brief notes that choosing to use forfeitures to fund matching contributions avoids a significant risk: a funding shortfall that could force the fiduciary into a protracted and costly legal dispute with the sponsor to secure unpaid contributions. From this perspective, the fiduciary's choice is a calculated act of prudence, balancing immediate administrative ease against the potential for future litigation and participant harm from delayed contributions.

The bottom line is that vulnerability is not inherent in the practice, but in the plan's design. A plan with rigid, mandatory language directing forfeitures solely to administrative expenses would present a different, more vulnerable scenario. The current wave of litigation targets the common, flexible model. The DOL's intervention, citing decades of administrative understanding and Treasury guidance, aims to solidify that model as a legitimate and prudent fiduciary exercise. The outcome will depend on whether courts view the plan document's flexibility as a shield or a vulnerability.

Financial and Strategic Implications for Plan Sponsors

The legal uncertainty surrounding plan forfeitures has forced a costly strategic recalibration on corporate balance sheets. A ruling against the practice would trigger a material increase in required contribution obligations, directly impacting cash flow. For sponsors that have used forfeitures to offset matching contributions, the financial hit is immediate and substantial. This could compel some employers to reduce or even eliminate their matching contributions altogether, a move that would undermine employee retention and participation rates. The practice is not a minor administrative detail; it is a core lever for managing plan funding costs. Removing it shifts a significant, predictable expense from the plan's funding mechanism to the sponsor's operating budget.

This legal threat also creates a severe compliance burden that diverts critical resources. Plan fiduciaries must now allocate time and capital to defend against litigation, a task that pulls focus from their primary fiduciary duties. The administrative overhead of monitoring multiple lawsuits, preparing legal defenses, and potentially revising plan documents is substantial. This is not a one-time cost. The litigation wave has been persistent, with over 30 class action lawsuits filed since late 2023. The ongoing legal defense consumes internal counsel hours, external legal fees, and executive attention that would otherwise be directed toward optimizing plan design and participant outcomes.

The Department of Labor's consistent intervention is a powerful stabilizing force. By filing amicus briefs in key appeals, the agency is reducing the uncertainty that has plagued the market. Its stance-that the practice is a standard, permissible "settlor" decision on plan funding and design-supports the status quo and protects plan sponsor balance sheets from an abrupt, adverse accounting impact. The DOL's argument that a fiduciary's choice to use forfeitures to fund contributions avoids a greater risk of litigation over unpaid obligations provides a clear, prudent rationale. This regulatory clarity is invaluable for corporate treasury and legal departments, allowing them to plan with greater confidence and avoid the costly contingency planning required in an unsettled legal landscape. The bottom line is that the DOL's defense is not just a legal maneuver; it is a shield for corporate financial stability.

Catalysts, Scenarios, and What to Watch

The next phase of this legal and financial story is now set. The immediate catalyst is the Ninth Circuit Court of Appeals' review of Wright v. J.P. Morgan Chase. The court is being asked to uphold a district judge's dismissal of the case, a decision that was already made with prejudice. The Department of Labor's amicus brief, filed just last week, has already laid out a clear precedent for this outcome. The agency's argument-that using forfeitures to offset contributions is a standard, permissible "settlor" decision on plan funding and design-provides a powerful, high-level endorsement of the fiduciary's position. A ruling in favor of J.P. Morgan would be a decisive victory for the DOL's stance and a major setback for the plaintiffs' novel theory.

The broader strategic implication hinges on whether other appellate courts follow the Ninth Circuit's likely path. The DOL's consistent intervention in multiple cases suggests it is positioning for a circuit split. If the Ninth Circuit upholds the dismissal while other circuits, like the Third or Eighth, reach a different conclusion, a split would emerge. This would force the issue to the Supreme Court, where a definitive national standard could be set. For now, the DOL's clear advocacy in the Ninth Circuit is a stabilizing force, but the ultimate resolution depends on the appellate landscape. A unified national standard, supported by the DOL, would bring lasting clarity. A fragmented circuit split would prolong uncertainty and litigation for years.

Finally, investors and plan sponsors should monitor for any legislative or regulatory action. The DOL's current position is one of defense, not offense. Its amicus briefs are about interpreting existing law, not proposing change. Given the agency's explicit support for the practice as a standard "settlor" decision, the probability of a sudden regulatory reversal or new legislation targeting forfeitures appears low. The focus remains on judicial interpretation. The DOL's role is to provide a consistent, authoritative view of ERISA's requirements, which it has done. Any future shift would likely come from a change in the agency's leadership or a broader policy re-evaluation, neither of which is indicated in the current evidence. For now, the watchlist is clear: the Ninth Circuit's decision, the path of other appeals, and the absence of regulatory surprise.