A Second Suit Stakes Out Forfeiture Use as Fiduciary Breach

For the second time in a month, a law firm has brought suit challenging the use of forfeitures in a 401(k) plan.

The lawyers are from Hayes Pawlenko LLP, a South Pasadena, CA-based duo (who met in law school, according to their website) positioning themselves as an employment litigation firm “representing employees in disputes with their employers.”

The most recent suit (Rodriguez v. Intuit Inc., N.D. Cal., No. 5:23-cv-05053, complaint 10/2/23) has been filed against Intuit, less than two weeks after filing an identical action against the Thermo Fisher Scientific Inc. 401(k) Retirement Plan. This suit, filed in the Northern District of California, acknowledges that “the Plan provides that forfeited nonvested accounts may be used to pay Plan administrative expenses or reduce future Company matching contributions.”

The suit then goes on to acknowledge that “although the Plan expressly authorizes the use of forfeited funds to pay Plan expenses, throughout the class period Defendants chose to utilize the forfeited funds in the Plan for the Company’s own benefit, to the detriment of the Plan and its participants, by reallocating nearly all of these Plan assets to reduce future Company matching contributions to the Plan.”

And then the suit proceeds to outline, year by year, the reduction of annual company matching contributions “as a result of Defendants’ reallocation of forfeited nonvested funds for the Company’s own benefit…”

The suit continues, “while Defendants’ reallocation of the forfeitures in the Plan’s trust fund to reduce its future matching contributions benefitted the Company by reducing its own contribution expenses, it harmed the Plan, along with its participants and beneficiaries, by reducing future Company matching contributions that would otherwise have increased Plan assets and by causing participants to incur deductions from their individual accounts each year to cover administrative expenses that would otherwise have been covered in whole or in part by utilizing forfeited funds.”

Duty ‘Bound’

As was the case in the Thermo Scientific suit, this one reminds that “defendants were required to discharge their duties with respect to the Intuit Plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” But then goes on—even though the plan fiduciaries were apparently acting well within the plan’s provisions and the law—to claim that “defendants have continuously breached their duty of prudence under 29 U.S.C. § 1104(a)(1)(B) throughout the class period by declining to use the forfeited funds in the plan to eliminate the administrative expenses charged to participant accounts and instead using such Plan assets to reduce the Company’s own contributions to the Plan.” 

The suit further claims that “defendants failed to engage in a reasoned and impartial decision-making process to determine that using the forfeited funds in the Plan to reduce the Company’s own contribution expenses, as opposed to the administrative expenses charged to participant accounts, was in the best interest of the Plan’s participants or was prudent, and failed to consider whether participants would be better served by another use of these Plan assets after considering all relevant factors.” They close their argument by stating that “by declining to use forfeited funds in the Plan to eliminate the administrative expenses charged to participant accounts, and instead using such Plan assets to  reduce the Company’s own contribution expenses, Defendants caused the Plan to receive fewer contributions that would otherwise have increased Plan assets and caused participants to incur expense deductions from their individual accounts that would otherwise have been covered in whole or in part by utilizing the forfeited funds to pay Plan expenses.”

All of which the plaintiffs argue that “as a direct and proximate result of Defendants’ fiduciary breaches described herein, the Plan suffered injury and loss for which Defendants are personally liable and are subject to appropriate equitable relief, pursuant to 29 U.S.C. § 1109, including, without limitation, the disgorgement of all ill-gotten profits to Defendants resulting from the breach of their duty of prudence.” 

Moreover, they continued that “each Defendant knowingly participated in the breach of the other Defendants, knowing that such acts were a breach, enabled other Defendants to commit a breach by failing to lawfully discharge its own fiduciary duties, knew of the breach by the other Defendants and failed to make any reasonable effort under the circumstances to remedy the breach. Thus, each Defendant is liable for the losses caused by the breach of its co-fiduciary under 29 U.S.C. § 1105(a).”

Will this suit get traction? I can’t imagine so. Will this be the end of these suits? I very much doubt it. 

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.