Avoiding Lawsuits Over Forfeitures
Employers offering retirement plans with forfeiture provisions should be aware of a growing legal trend that challenges how these forfeitures are managed. Forfeitures refer to funds that remain when the unvested portion of a participant's account is forfeited, and recent lawsuits argue that these funds are being misused. One such case, Perez-Cruet v. Qualcomm, has gained attention for surviving a motion to dismiss, prompting employers to reconsider their plan structures to avoid litigation.
The Qualcomm Case: A Legal Precedent
In the Qualcomm case, the lawsuit claims that the company used forfeited retirement funds to benefit itself rather than plan participants. The plaintiffs argued that Qualcomm had discretion to use forfeitures to cover plan administrative expenses but instead applied them solely to reduce the company's contributions to the plan. The court allowed this claim to proceed, suggesting that Qualcomm’s actions may have breached its fiduciary duty by putting the employer's interests above those of the participants.
Discretion vs. Ministerial Acts
The central issue in cases like Qualcomm is the level of discretion a plan administrator holds. When the plan allows discretion in how forfeitures are used, the administrator is acting as a fiduciary and may be held accountable for decisions that appear to prioritize the employer's interests. However, if the plan clearly specifies how forfeitures must be allocated, the administrator is acting in a ministerial capacity, reducing legal risk.
How Employers Can Avoid Litigation
Employers can protect themselves by amending their retirement plan documents to remove any discretionary authority over forfeitures. For example, a plan could specify that forfeitures will first be used to cover plan expenses, with any remaining funds allocated to other permitted uses, such as offsetting employer contributions. This proactive step ensures that the plan administrator cannot be accused of making self-serving decisions, as there would be no discretion involved.
To mitigate the risk of lawsuits, employers should consider restructuring their retirement plans to eliminate discretionary use of forfeitures. By clarifying the rules for forfeiture allocation, companies can ensure they are fulfilling their fiduciary responsibilities while protecting themselves from potential legal challenges.
