A suit alleging a breach of fiduciary duty has been filed because the plan fiduciaries offset employer contributions with forfeitures, rather than using them for the “exclusive benefit” of participants.
Plaintiff Konstantina Dimou, a participant in the Thermo Fisher Scientific Inc. 401(k) Retirement Plan, filed suit on behalf of the plan as a representative of a class of participants and beneficiaries of the Plan, against Defendants Thermo Fisher Scientific Inc. and the Management Pension Committee of the Thermo Fisher Scientific Inc. 401(k) Retirement Plan “for (1) breach of ERISA’s fiduciary duties, (2) violation of ERISA’s anti-inurement provision, and (3) engaging in self-dealing and transactions prohibited by ERISA.”
The suit, filed in the U.S. District Court for the Southern District of California (Dimou v. Thermo Fisher Scientific Inc., S.D. Cal., No. 3:23-cv-01732, complaint 9/19/23) states that the plan “provides for an individual account for each participant and for benefits solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeiture of accounts of other participants which may be allocated to such participant’s account.”
Further, it explains that participant accounts (some 30,000) are charged with an allocation of the administrative expenses paid by the Plan, which are shared by participants equally, and that the administrative expenses paid by the Thermo Fisher Plan each year for recordkeeping fees, advisory fees, annual report fees, and legal fees, have ranged from $340,000 to $1,373,830 over the past six years. Needless to say (though the suit does), “the deduction of administrative expenses from participant accounts reduces the funds available to participants for distribution and/or investing.”
Document Details
The suit proceeds to outline how forfeitures originate (when a participant has a break in service prior to full vesting of the matching contributions), and how the “defendants exercise discretionary authority and control over how these Plan assets are thereafter reallocated.” Indeed, the suit states that the plan documents provide that “the Company shall allocate and use all or a portion of the amount of a Participant’s benefit forfeited under the Plan either to pay reasonable expenses of the Plan (to the extent not paid by the Employer) or to reduce its Discretionary Contributions, Special Contributions, Matching Contributions and/or other contributions payable under the Plan, for the Plan Year in which the forfeiture occurs or any prior or future Plan Year, as determined by the Company.”
However, the suit proceeds to acknowledge that “although the governing Plan documents expressly authorize the use of the forfeited funds to pay Plan expenses, and thereby reduce or eliminate the amounts charged to the participants’ individual accounts to cover such expenses, Defendants have consistently declined to use any of these Plan assets for such purposes over at least the past 6 years.” Instead, the suit comments that “defendants have consistently chosen to utilize the forfeited funds in the Plan exclusively for the Company’s own benefit, to the detriment of the Plan and its participants, by using these Plan assets solely to reduce future Company contributions to the Plan”—and then proceeds to note that: “In 2022, Company contributions to the Plan were reduced by $5,934,000 as a result of Defendants’ reallocation of forfeited nonvested account balances for the Company’s own benefit, leaving a balance of $3,773,000 in the forfeiture account, none of which was used to pay Plan expenses.”
The suit then proceeds to detail similar figures for the years 2021–2017, before commenting that “while Defendants’ reallocation of the forfeitures in the Plan’s trust fund to reduce its future contributions benefitted the Company by reducing its own contribution expenses, it harmed the Plan, along with its participants and beneficiaries, by reducing future Company 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 to pay Plan expenses.”
Exclusive, Purposed
Now, if you’re wondering what the problem is, the suit goes on to note that the “defendants were required to discharge their duties to the Thermo Fisher Plan ‘solely in the interest of the participants and beneficiaries’ and ‘for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.’” That said, they argue that the “defendants have continually breached this duty of loyalty with respect to their control and management of the Plan’s assets over the past 6 years by choosing to utilize forfeited funds in the Plan exclusively for the benefit of the Company rather than solely in the interest of the participants and beneficiaries.”
They conclude by noting that, “instead of acting solely in the interest of Plan participants by utilizing forfeited funds in the Plan to reduce or eliminate the administrative expenses charged to their individual accounts, Defendants chose to use these Plan assets for the exclusive purpose of reducing its own future contributions to the Plan, thereby saving the Company millions of dollars each year at the expense of the Plan.” Moreover, they argue that “as a direct and proximate result of Defendants’ fiduciary breaches described herein, the Plan suffered injury and loss for which they 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 loyalty.”
Will the court be convinced? Stay tuned.
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.
