Amid a rising tide of lawsuits over the use of forfeited retirement plan contributions, a federal court has dismissed a putative class action against AT&T Services Inc., clarifying fiduciary duties under the Employee Retirement Income Security Act (ERISA).
Plaintiff Luis Hernandez alleged that AT&T violated ERISA by using forfeited plan funds — contributions made by employees or employers that become unvested when a worker leaves — primarily to reduce employer contributions rather than exclusively to benefit plan participants.
AT&T moved to dismiss the case under Rule 12(b)(6), arguing that Hernandez’s claims were legally implausible. The U.S. District Court for the Central District of California, presided over by Judge Otis D. Wright II, granted the motion in part. The court concluded that the complaint failed to state a plausible claim for relief regarding the improper allocation of forfeitures because the plan document explicitly allowed the challenged uses. Hernandez’s attempt to reinterpret the plan to require all forfeitures be applied solely to administrative expenses sought “benefits beyond those promised in the Plan,” a standard ERISA does not mandate, the court said.
On the prohibited transaction claim under ERISA § 1106, the court ruled that using forfeitures to offset employer contributions did not constitute a “transaction” placing the plan at special risk because the plan’s terms explicitly allowed it. Hernandez was initially denied leave to amend these claims related to reallocation theories already rejected in prior cases, but the court permitted him to amend other parts of the complaint to clarify factual allegations or legal theories not barred by precedent, giving him a limited opportunity to revise aspects of the lawsuit.
Forfeited plan funds represent a small but significant portion of retirement plan assets. They are typically used to reduce employer contributions, pay plan expenses, or fund other plan-authorized purposes. Mismanagement of these funds has been the basis of numerous lawsuits in recent years, including recent claims against Centene Management Corp. and Humana Retirement Savings Plan. Courts have generally held that as long as plan documents authorize specific uses of forfeitures, fiduciaries are not obligated to allocate them exclusively for participant benefit.
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