Two more suits in two different California federal district courts have just challenged the use of plan forfeitures to offset company contributions as not being in the best interests of plan participants.
The latest (McManus v. Clorox Co., N.D. Cal., No. 4:23-cv-05325, complaint 10/18/23) is none other than the fiduciaries of the Clorox Company 401(k) plan, which is being sued by participant-plaintiff James McManus 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.” Earlier in the week, identical claims were made against the fiduciaries of the Qualcomm Incorporated Employee Savings and Retirement Plan.
The Clorox suit was filed in the U.S. District Court for the Northern District of California by a pair of lawyers from Hayes Pawlenko LLP, a South Pasadena, CA-based firm that positions themselves as an employment litigation firm “representing employees in disputes with their employers.” The Qualcomm suit was filed in the Southern District of California.
Interestingly enough, they had previously filed identical charges against Intuit and Thermo Fisher Scientific plans for—as was the case here and as permitted by the plan document—exercising their discretion to offset forfeited balances of terminated participants to reduce company contributions, rather than to offset expenses of the 401(k) plan. Those two suits were also filed in the U.S. District Courts of the Northern and Southern District of California, respectively.
The suits acknowledge the discretion to do so, but position that decision as having “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 Company contributions to the Plan.”
As in the other cases, the suits take pains to outline the dollar amounts, from 2017 forward, that were used “as a result of Defendants’ reallocation of forfeited funds for the Company’s own benefit.”
Their claim is 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 at the expense of the Plan which received decreased Company contributions and its participants and beneficiaries who were forced to incur avoidable expense deductions to their individual accounts.”
Moreover, the suits claim 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.”
Here's betting this won’t be the last such filing.
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.
