Forecasting Forfeiture Changes

Sponsored by: MFS Investment Management

There have been several lawsuits recently alleging breach of fiduciary responsibility by plan sponsors due to the way in which forfeitures are allocated. To date, none of the lawsuits have moved forward or have been found in favor of the plaintiff, but we wondered if this new avenue of legal action was prompting plan sponsors to reevaluate their forfeiture policies. So far, most plan sponsors (75 percent) are comfortable with their current policies and feel that as long as they are following the plan document, they should be fine. Fewer than ten percent of plans (7.1%) are currently reevaluating their forfeiture policy, though many are monitoring the outcomes of the current litigation to inform any future changes. Comments follow. 

Comfortable with Current Policy

• Although we will not be changing our forfeiture policy, I did reach out to our broker to confirm that we are indeed able to use forfeitures to reduce our match and that we are not in breach of fiduciary responsibility specifically because of all these recent lawsuits.
• As long as we are following ERISA, we feel comfortable with our current polies until the lawsuits are resolved.
• Any remaining forfeitures (after restoring previously forfeited amounts to Participant Accounts) are reallocated to other Participants in proportion to Compensation, as additional Non-Elective Contributions.
• Discussed at our quarterly committee meeting and decided that ERISA says to follow plan language which allows forfeitures to offset employer contributions.  As long as following plan language, feel comfortable with our current policy.
• From a litigation standpoint, we are not concerned about our current policy or it's execution.  From a legislative standpoint, this could be a concern if our lawmakers got involved to implement more of a wholesale change on treatment of forfeitures.
• I did bring it up with my RK Client Executive and she was adamant that as long as the Plan Document allows forfeitures to be used for the reasons we are using them for, then we are fine.  I'm still keeping an eye on the lawsuits.
• Our policy will work and we will continue to review periodically to ensure compliance.
• Ours are very small amounts, used only to reduce the company's costs of match each month.
• These lawsuits are frivolous and frustrating. A lot of wasted resources and the outcome will not be advantageous to the participant. Ultimately, some companies could reduce it's company match allocation by the amount of forfeitures they no longer have available for offset.
• We actively consider the balance between participant and employer, and observe a 50/50 use of Forfeiture monies, so we are equitable to all.
• We apply account plan expenses
• We audit frequently to ensure minimal balance.
• We follow the plan document
• We recently switched our plan structure to that of a Safe Harbor plan, so the employer contributions into an employee's 401(k) fund are immediately 100% vested. We do however still have a small forfeiture balance left over from the pre-Safe Harbor days. This fund has always been used to cover administrative costs on the plan, so although our plan structure has changed, our forfeiture policy hasn't.
• We've only used forfeiture funds for admin expenses, which doesn't seem to be the target of the lawsuits.

Currently Evaluating

• Although we believe our policies are okay, we believe we should review to ensure everything is okay.
• In our quarterly investment committee meeting, we reviewed our forfeiture policy.
• We are 100% vested with the exception of profit share which hasn't created much forfeiture balance. What we do have in forfeitures has always been used to pay a portion of plan audit fees.
• We are reviewing our Plan Documents to ensure the language is clear.

Other comments:

• The review of forfeiture account balances is an annual task.  We check the balance and verify the usage.
• Waiting for the outcome before spending the time to reevaluate our policy.
• We are comfortable with our current policy but are monitoring the lawsuit outcomes.
• We are comfortable with our policy but looking all the same
• Will evaluate and consider outcomes
• This is touchy subject, will address at our next committee meeting.
• Will have to learn about this issue.