There has been a deluge of ERISA lawsuits alleging misuse of forfeiture assets to offset a plan sponsor’s match contribution rather than benefit participants and beneficiaries, with the most recent case filed on Feb. 7, 2025, in the Eastern District of Missouri by the Schlichter Bogard law firm. If these cases are successful, it could change the way most defined contribution plans are run.
Initially thought of as a nuisance, plan sponsors and defense counsel are starting to take these cases seriously, as heavyweights like Jerry Schlichter are betting they will be successful.
The central issue is whether assets in forfeiture accounts, most of which come from unvested matching contributions, are plan assets. If so, then they must be used for the exclusive benefit of the participants, not to reduce a plan sponsor’s match contribution. Schlichter stated that, “These are plan assets as they are already in the plan.”
Matthew Eickman, chief legal officer at the Fiduciary Law Center, agreed, arguing, “The mere promise to make a payment just like late contributions are still plan assets. Does vesting matter?”
There are three types of forfeiture cases, according to Carl Engstrom, a partner in Engstrom Lee, which represents plaintiffs, including:
- Plan documents do not allow forfeiture assets to reduce matching contributions
- The plan has discretion
- Offsetting match contributions are allowed
“The plan document is the centerpiece,” said Engstrom. “It is unlikely that courts will go against the documents, which was the case in the recently dismissed Honeywell lawsuit.”
Engstrom further noted, “The tide is turning for defendants. People in the know only file complaints in the first scenario.” He further argued that the money is being used for its original purpose and that courts are balancing protection of participants against being too restrictive. (Note: Engstrom Lee has not filed a forfeiture lawsuit.)
Though some cases like Honeywell have been dismissed, Eickman said many were without prejudice, allowing the plaintiffs to file an amended complaint.
The recently filed Charter case alleges that from 2017 to 2024, the plan documents stated that forfeiture assets should be used first to pay down administrative expenses, which were paid by participants through revenue sharing, and when exhausted, could be used to offset the match. The plan documents were recently amended.
Along with failing to follow plan documents, Schlichter alleged a breach of the fiduciary duty of loyalty and prudence, a violation of anti-inurement law and various prohibited transactions.
The IRS does allow for the practice of offsetting matches, but Schlichter stated, “There is no Chevron deference, and it will not trump ERISA.”
Neither will plan documents if courts decide that forfeitures are plan assets and are subject to the exclusive benefit rule.
If plans want to use forfeiture assets to lower match contributions, the least they should do is amend their plan documents. But since it will be years before the law is settled and might end up in the U.S. Supreme Court, Schlichter stated, “It is important for advisors [and consultants] to tell plan sponsors that there is a significant risk. And make sure they document that advice if the plan does not follow it.”
DC plans have come a long way—not only are they still being retrofitted to replace defined benefit plans, larger DC plan sponsors are still adjusting from having almost complete discretion on the use of assets under pension plans because they bore the responsibility if assets did not cover liabilities, to DC plans where participants bear that responsibility overseen by prudent and loyal fiduciaries that are not allowed to self-deal. Smaller plans are just waking up to the awesome fiduciary liability under ERISA, which is the highest known law in the world.
At its core, if the forfeiture accounts are deemed to be plan assets, it seems only fair that they should inure to the benefit of the participants and their beneficiaries regardless of an IRS rule, plan documents or established practice.
The courts will ultimately decide, but in the meantime, why take the risk, which could unfortunately result in some plans lowering their match?
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.