Forfeiture lawsuits are the latest hot trend in ERISA litigation. The deluge of ERISA lawsuits triggers a number of different reactions, many of which are accompanied by eye rolls, clenched jaws, and expressions of exasperation or even anger. Naysayers are frustrated (with the plaintiffs’ bar) or dismissive (suggesting there’s nothing here).
Those emotional reactions are a disservice to plan sponsors and fiduciaries. They also mask an opportunity for retirement plan advisors to demonstrate an educated perspective on a topic with much greater nuance than the knee-jerk naysayers may suggest. Some of the allegations may be unfounded and borderline unfair (such as the Sievert v. Knight-Swift case that was dismissed with prejudice in early May). Some of the allegations may be more reasonable but ultimately unsuccessful (such as those in the Barragan v. Honeywell case). But what of the allegations with a reasonable chance of success? Retirement plan advisors can help their clients take steps to achieve greater protection.
Understanding the Allegations
As a general matter, the forfeiture suits feature claims that plan fiduciaries have used plan forfeitures in a manner that conflicts with their fiduciary responsibilities. The specific claims vary, depending on the firm filing the suit, the particular plan’s terms or factual information regarding forfeiture use. One could reasonably separate the claims into three categories:
Although plan language permitted the fiduciaries to choose between optional uses, they breached their duties by choosing an option that failed to put participants first;
The forfeitures were not used in a manner consistent with clear plan language that establishes an ordering rule for their use; or
A blend of the first two categories, where the plan language is ambiguous and open to interpretation.
The first and third categories are largely unsettled and likely to depend on the particular court considering the case. The second category seems more straightforward; if the fiduciaries have not followed clear plan language, they’ve likely breached their responsibilities.
Litigation Outcomes and Trends
In the last two years, plaintiffs have filed more than 40 class action lawsuits addressing the use of plan forfeitures, and the fiduciaries have responded with motions to dismiss the suits. The results have been all over the map.
The courts have granted several motions to dismiss, sometimes with prejudice and sometimes without. Some of those dismissals without prejudice have been followed by refiled, “better plead” complaints. The courts have denied other motions to dismiss, thereby permitting the suits to proceed to discovery, which opens the door to settlements (like the one announced on April 29 in the Rodriguez v. Intuit, Inc. case).
As is typically the case within a new class action trend, the plaintiffs bar is learning as it goes. Although we don’t yet have a fully developed collection of “substantive” rulings on these forfeiture allegations, we can see that the plaintiffs bar is sharpening its pleading tools. We can expect plaintiffs to gain a clearer understanding of the specific plan document language in place and to rely on publicly available company financials to identify the specific forfeiture dollar amounts that may have been used in contravention of the plan language. Perhaps the clearest example of that latter trend exists in the Curtis v. Amazon.com, Inc. complaint, which relies upon publicly available financials to list year-by-year forfeiture use amounts totaling more than $350 million over six years.
Opportunities for Advisors
Plan sponsors expect their plan advisors to be familiar with the forfeiture litigation allegations and court rulings. This presents advisors with both opportunity (to demonstrate a sophisticated understanding) and reputational risk (in the event they cannot). Although it might be unreasonable for each advisor to self-educate to the appropriate level, any sizable retirement practice should have the national or home office resources to help with their advisors at two distinct levels.
First, the firm should catalogue the plan document providers—typically the record keeper or third-party administrator—that its clients use and develop a database that tracks the respective plans’ forfeiture language. This approach does not require analysis or opinions; it’s merely about fact-gathering.
Second, the firm should help its advisors develop a framework for committee discussions that will help the advisor and client navigate the relevant issues. That framework should seek answers to specific questions, such as whether the plan has forfeitures, how any forfeitures are being used, what the applicable plan document says, whether the use is consistent with the document, and whether any document modifications are necessary and appropriate.
The lawsuits are likely to continue targeting the mega and large market plans. However, as we’ve seen with other retirement plan class action trends—such as excessive investment or recordkeeping expenses—the large market’s litigation outcomes inform industry expectations for the mid- and small markets, as well. Advisors should avoid the temptation to dismiss the significance of forfeiture lawsuits. They should embrace the reality that their clients rely on them to take litigation trends seriously and to guide their clients toward a protected position.