KEY POINT: The HP Court rejects the liability theory behind the novel forfeiture fiduciary-breach claims that every plan fiduciary decision needs to reduce administrative plan expenses charged to participants. Instead, the court confirmed that the goal of ERISA fiduciary law is to ensure that plan participants receive their promised benefits. This formula should be applied to dismiss any forfeiture liability claim in which the plan fiduciaries faithfully followed the terms of plan documents and the long-settled fiduciary practice to offset forfeitures against further contributions.
We live in an era of regulation through litigation. Plaintiff lawyers have become the primary police of fiduciary law, and they have become emboldened to create liability from standard and customary fiduciary practices. Recent lawsuit theories have expanded to change plan design decisions and increase promised plan benefits under the threat of personal fiduciary liability and litigation risk. A primary example is the recent surge in forfeiture fiduciary-breach lawsuits, which have spread like wildfire, with close to forty cases filed in less than eighteen months.
These lawsuits defy the foundational premise of ERISA that the decision to offer employee benefits is voluntary. Indeed, nothing in ERISA mandates what kind of benefits employers must provide if they choose to offer an employee benefit plan. But this has not stopped the plaintiff bar ERISA police from weaponizing class action litigation to force plan sponsors to bear a higher burden of plan administrative and investment fees than required under governing plan documents.
Against this backdrop, the February 5, 2025 dismissal with prejudice by a Northern California district court of the Paul Hutchins v. HP Inc. ERISA forfeiture lawsuit is a watershed moment. Disregarding years of settled forfeiture practices and a proposed Treasury regulation, plaintiffs argue that using forfeitures to offset future employer contributions violates ERISA because it prioritizes the employer’s financial interests over the best interests of plan participants. The plaintiff theory is that in every possible instance when a plan fiduciary has the option between using forfeited funds to pay administrative costs or reduce employer contributions, the fiduciary would always be required to choose to pay administrative costs to act in the best interests of plan participants. These lawsuits hijack long-standing fiduciary law and attempt to increase the benefits promised under the governing plan document in most voluntary defined contribution plans. The cases attempt to devolve every fiduciary discretionary decision into an all-consuming obsession with minimizing plan fees.
The HP court rejected these fiduciary-breach and disloyalty theories on two critical grounds. First, it held that ERISA does not require an exclusive duty to maximize pecuniary benefits to participants. It rejected the theory that every plan fiduciary decision needs to reduce administrative expenses. Instead, the court reinforced the supremacy of the plan document, holding that ERISA’s goal is to ensure that participants receive promised benefits. And that is what every HP participant received.
Second, the court held that fiduciaries are protected by following settled fiduciary law and practice. Plaintiff’s forfeiture fiduciary-breach theory ignores “decades of settled law” and the long history of using forfeitures to reduce employer contributions. The HP court rejected any attempt to assert that general fiduciary duty provisions of ERISA abrogate these long-settled rules regarding the use of forfeitures in defined contributions plan.
The HP ruling rejects the brazen attempt by the unelected ERISA plaintiff bar to regulate changes to fiduciary law through high-stakes litigation. The HP court’s analysis should apply in any forfeiture lawsuit in which plan fiduciaries faithfully followed the terms of the plan document. The following analyzes three key points of the HP decision rejecting the novel forfeiture fiduciary breach claims. We end with a brief analysis of the different fact pattern alleged in the Schlichter firm’s forfeiture lawsuit against Charter Communications.
KEY POINT #1: The goal of ERISA is to ensure that participants receive promised benefits, not to require that every plan fiduciary decision needs to reduce plan administrative expenses.
The HP 401(k) plan matches four percent of eligible earnings that a participant contributes each pay period at 100 percent. HP’s contributions are subject to a three-year cliff vesting schedule, in which a participant who stays employed by HP for three years becomes 100 percent vested in employer contributions in the participant’s account. If a participant experiences a “break in service” prior to this full vesting of HP’s matching contributions, however, the participant forfeits the balance of HP’s unvested matching contributions in the individual’s plan account. HP then has control over how those forfeited matching contributions are used, with the Plan indicating that forfeited amounts may be used to “reduce employer contributions, to restore benefits previously forfeited, to pay Plan expenses, or for any other permitted use.”
Unless HP allocates forfeitures to pay plan expenses, those administrative expenses are charged to plan participants’ accounts. The First Amended Class Action Complaint alleged that each participant’s account was charged “a fixed amount of $34 per year for recordkeeping services.”
For perspective, unless the plan forfeitures could be used to offset plan investment fees, which constitute well over 80% of overall fees charged to participants, this lawsuit is not about any material change to any HP participant’s retirement prospects. It is about potential recoveries to the plaintiff lawyers.
How do we prove that?: by doing simple math. $34 is a super low recordkeeping fee that is only available in the largest plans in the country. It is important to understand that HP has offered its employees an ultra low-fee plan that benefits every fortunate HP 401k plan participant. If the same employee worked in a tiny technology startup with 100 or less employees, the administrative fees in their 401k plan would likely be at least 30-60 basis points on a percentage-of-assets basis. The recordkeeping fees for a $100,000 account balance in the HP plan would equal $34; by contrast, the recordkeeping fees for the same $100,000 account at a tiny startup company would equal $300 to $600 annually. The fees in the jumbo HP plan are less than 10% of the typical small 401k plan sponsored by most companies in America.
HP’s first argument was that the complaint was seeking a categorical increase in benefits provided under the plan. The district court agreed. It started with the fundamental premise that the HP 401k plan is a voluntary benefit provided by the employer: “Nothing in ERISA requires employers to establish employee benefit plans,” and ERISA does not specifically “mandate what kind of benefits employers must provide if they choose to have such a plan.” Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996). Instead, ERISA “seek[s] to ensure that employees will not be left empty-handed once employers have guaranteed them benefits.” Id.; Hughes Aircraft Co. v. Jacobson, 525 U.S. 882, 887 (1996).
The court agreed with plaintiffs that HP assigned the decision of how to reallocate forfeited contributions to the plan administrator as fiduciary, thereby guaranteeing to plan participants that the decision would be made pursuant to fiduciary obligations. But the court did not agree that “acting in the best interests” of plan participants and beneficiaries requires “maximizing pecuniary benefits” to individual participants or “resolving every issue of interpretation in favor of plan beneficiaries.” Instead, “an ERISA fiduciary’s duty is to ensure that all participants have received the full benefit guaranteed to them by the plan document.” To this end, the complaint acknowledged that participants had received their full employer contributions under the HP plan document. In sum, the HP ruling holds that a fiduciary breach claim must assert wrongdoing, which is measured by whether plan fiduciaries met their benefit obligations.
This ruling is relevant to the nascent attempt to create fiduciary liability for alleged failure to control prescription drug costs in company-sponsored health plans. The threshold issue is whether participants have standing to assert excessive fee fiduciary breach claims. The Third Circuit’s in Knudsen v. Met Life Group on September 25, 2024 rules that plan participants lack standing to sue for a share of PBM rebates because they failed to allege non-speculative economic harm. The Third Circuit did not categorically rule that there is never standing in any health plan excessive fee case when participants are receiving their promised benefits. Nevertheless, the court made clear that any future case must allege harm to participants by showing that they were charged more than is allowed under the plan document. The but-for cause of liability must be tied to the plan document. We read the HP decision the same way: requiring a fiduciary breach claim to allege wrongdoing tied to benefits promised in the plan document – not judging fiduciary decisions based on a singular focus on reducing plan fees.
KEY POINT #2: Plan fiduciaries can rely on long-settled fiduciary practices in how plan forfeitures are handled.
Plaintiff’s arguments ignore “decades of settled law” allowing defined contribution plans to use forfeitures exactly as HP did. The court held that settled law matters, rejecting the plaintiff-lawyer manufactured claim that fiduciaries can be liable for following a plan document that follows long-standing fiduciary law and practice.
The U.S. Department of the Treasury has addressed by regulation in 26 C.F.R. § 1.401-7(a) how ERISA-covered defined benefit pension may handle forfeitures, stating that forfeited amounts “must be used as soon as possible to reduce the employer’s contributions under the plan.” In 2023, the Treasury Department reaffirmed its position and proposed another regulation regarding defined contribution plan forfeitures, which would permit the forfeited employer contributions to be used for three purposes “as specified in the plan: (1) to pay administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants’ accounts in accordance with plan terms.” See Use of Forfeitures in Qualified Retirement Plans, 88 Fed Reg. 12282-01 (Feb. 2023). The 2023 proposed regulation, if adopted would continue to allow the decades-long practice of using forfeitures to offset future employer contributions. The U.S. Department of Labor, which is tasked with primary enforcement of ERISA, has never asserted that the use of forfeitures to offset further employer contributions violates ERISA.
The court rejected plaintiff’s theory that ERISA’s general fiduciary duty provisions abrogate long-settled rules regarding the use of forfeitures in defined contribution plans. The court noted that plaintiffs offered no reason why settled law should be changed. We would go a step further and suggest that there was no persuasive reason offered as to why plaintiff lawyers should be allowed to change fiduciary custom and practice through litigation. Congress is in charge of fiduciary legislation, and DOL and Treasury are in charge of the regulation. This Article III court stayed in its proper lane, and properly deferred to the Article I legislators and Article II executive branch. This is how the constitutional system is supposed to work.
KEY POINT #3: The HP Court recognizes the critical difference between plan settlor and fiduciary decisions.
We have been worried for years that the distinction between settlor and fiduciary functions is being lost in the recent litigation surge, as more settlor functions have been subject to fiduciary exposure. The clever hook of the forfeiture cases is that the Hayes Pawlenko law firm took the position that the settlor function of deciding how to handle plan forfeitures became a discretionary fiduciary decision if the plan document gave the plan fiduciaries the discretion to choose between reducing future contributions or reducing participant expenses. On initial review, federal courts have agreed that applying forfeitures to future contributions is a fiduciary function. This has been a wake-up call to the plan sponsor community, which has assumed that plan forfeitures were a plan design decision that is not subject to fiduciary liability. The obvious takeaway is to eliminate discretion in plan documents, outlining a waterfall of how plan forfeitures should be applied, first to future plan contributions, and then to participant fees or benefits.
But the HP court did not allow liability merely because the plan document gave discretion to fiduciaries who were administering the plan. The HP court in both motions to dismiss decisions agreed with plaintiffs that a plan document that gives a discretionary choice regarding plan forfeitures represents a fiduciary decision. HP’s implementation of the settlor decision regarding forfeitures, the court held, was a “decision of Plan administration rather than plan design,” and therefore plaintiff adequately alleged that Defendant was acting as a fiduciary when deciding how to allocate the forfeitures.”
But the court did not stop there. The court held that plaintiff “goes awry” with the ”implicit suggestion” that “acting in the best interests of the plan participants and beneficiaries” requires “maximizing pecuniary benefits” to individual plan participants or “resolving every issue of interpretation in favor of plan beneficiaries.” Instead, the fiduciary test “is to ensure that all participants have received the full benefit guaranteed to them by the plan documents.” Plaintiff’s theory that HP effectively intended to create an additional benefit by including discretion or a choice in the plan document “is at odds” with prior law and the plan document “that the company retains discretion over whether to pay Plan expenses out of the Plan trust.”
The nuance of the court’s holding is that “HP acting as fiduciary implements the allocation of the forfeitures.” The court clarified that “HP (as fiduciary) will only use those forfeitures to play Plan expenses if HP (as settlor) decided that year that the Plan administrator should use at least some forfeitures to pay Plan expenses.” The court is validating that plan design decisions are settlor functions. The forfeiture plan design decision is implemented by fiduciaries in their administrative functions, but the court is not allowing a settlor design decision to create fiduciary liability.
In the end, the best way to interpret the HP decision is that the test for fiduciary liability is whether plan fiduciaries have failed to deliver promised benefits. The decision preserves the discretion of plan fiduciaries in how to meet that contractual obligation. Discretion and judgment are the hallmarks of fiduciary liability, and something that has been lost in recent fiduciary-breach litigation obsessed with plan fees in plans that already offer low fees.
KEY POINT #4: The Schlichter firms claims that Charter Communications violated its plan documents, which is different than the HP case and the other pending forfeiture cases.
The HP decision validates the supremacy of the plan document, and refused to impose liability on plan fiduciaries that faithfully followed the plan document and delivered the benefits promised to participants. Based on our review of the initial forfeiture cases, plan fiduciaries followed the terms of the plan document with respect to how forfeitures were applied to reduce future contribution obligations. Participants in every case were afforded the benefits promised under the plan.
The February 7, 2025 lawsuit Patrick O’Donnell v. Charter Communications, Inc. filed by the Schlichter law firm alleges a different fact pattern. The forfeiture claim against the jumbo plan with 102,013 active participants and $7.9B in assets as of December 31, 2023 asserts that the plan document mandated that forfeiture assets were first required to be used “to pay Plan administrative expenses.” Only if the plan forfeiture assets “exceed Plan administrative expenses,” the remaining assets could then be used to offset Charter’s required employer matching contributions: “Assets in Accounts which are forfeited shall be used to play Plan administrative expenses. To the extent that forfeitures exceed Plan administrative expenses, forfeitures shall be used to reduce the Employer Contributions.” The complaint alleges that the forfeitures used to reduce employer contributions ranged from $29.9 to $44.4 million from 2020 to 2023, while administrative expenses paid by plan participants ranged from $7.5 to $8.5m over the same time period.
The complaint notes that Charter amended its plan effective January 1, 2025 that “reversed the prioritization as to how Plan forfeiture asset would be used.” The plan now mandates that those assets must first be used to reduce Charter’s required employer matching contributions. Any remaining plan forfeiture assets where then to be used to pay “any expenses of administration not allocated” to a Plan participant’s account.
If true, this is a different fact pattern than the HP case, and any prior case in which it appears that plan fiduciaries were faithfully following the plan document and well-settled law regarding plan forfeitures. Nevertheless, we note that the plan does not mandate that plan forfeitures be applied solely to expenses charged to plan participants. The complaint purports to quote a section of the plan document that “[a]ll expenses of administration of the Plan, including legal fees, agent’s fees, costs of supplies, auditing fees, and other costs of operation shall be paid out of forfeitures, if any, and if none, borne by Charter, which shall upon request reimburse the Trustee from time to time therefor.” We read this provision to require application of forfeitures to the portion of plan expenses normally borne by the plan sponsor, not the plan participant. We do not see any mention of the requirement to defray the recordkeeping or investment fees borne by plan participants. Consequently, this is not a slam dunk case for the Schlichter firm. Nevertheless, it is a different fact pattern from the other pending cases.
