Wells Fargo latest to be sued over forfeited 401(k) money

Wells Fargo this week became the latest employer to be sued over how it uses forfeited 401(k) assets.

On Tuesday, a plaintiff filed a proposed class action in US District Court in the Northern District of California, alleging that the company, along with its human resources committee of the board of directors, and employee benefit review committee violated the Employee Retirement Income Security Act by misusing employer contributions forfeited by workers who left before being fully vested. The company has used such assets, to the tune of more than $2 million in 2022, to offset its future contributions to the $45.8 billion Wells Fargo 401(k) plan, rather than to help reduce expenses for plan participants, according to the lawsuit.

“By choosing to use forfeited plan assets to benefit itself and not the plan or the plan’s participants, defendants have placed its own interests above the interests of the plan and its participants,” the June 11 complaint read.

The lawsuit is seeking restoration of plan assets as well as attorneys’ fees and other potential relief.

A Wells Fargo spokesperson said the company declines to comment on the litigation.

Early trend

This year there have been about 10 cases filed with similar allegations against employers, including lawsuits against HP, Honeywell, Clorox, Mattel, Intuit, and Thermo Fisher Scientific. In May, a case brought against Qualcomm cleared its first major hurdle, surviving a motion to dismiss.

Lawyers who specialize in ERISA have noted that the line of litigation is novel and that federal tax code, as well as the Department of Labor, have allowed forfeited plan assets to be used for future employer contributions to 401(k)s, as long as the plan document identifies how the employer can handle those assets. Many plans have pre-approved documents from the plan provider that do not necessarily give employers flexibility in how such assets are used, but that can include offsetting future contributions.

A couple of ways for employers to address any ambiguity can be eliminating vesting requirements or amending a plan document to remove any choice the plan sponsor has in how forfeited assets are used, Daniel Aronowitz, president of Encore Fiduciary, recently told InvestmentNews.

In the Wells Fargo 401(k) case, the “nonvested portion is forfeited and serves to reduce future employer contributions, pay plan administrative expenses, or make corrective adjustments to participants’ accounts,” according to the complaint.

Plan discretion

Language that addresses how forfeited 401(k) assets can be used is helpful, especially if it doesn’t give an employer any discretion about that, said Nevin Adams, former chief content officer for the American Retirement Association.

“The suits to date seem to be saying that if the fiduciaries had discretion in how the forfeitures would be used, then the fiduciaries had a choice – and made one that they claim wasn't in the best interests of participants,” Adams said in an email.
How the cases will play out in the coming months, if not years, is uncertain. The fact that one case has so far survived a motion to dismiss is not necessarily indicative of its success or the ability of other lawsuits to clear that hurdle, which is “a pretty low bar,” he noted.

“We forget sometimes just how little non-industry insiders know how this stuff ‘works,’” he said.

“Also, the motion to dismiss that case [against Qualcomm] didn't make the argument that I find most compelling (and it's been made in other motions to dismiss these cases) - that the deployment of forfeitures is an administrative/design, not a settlor/fiduciary one,” he said. “Arguably, and as the judge pointed out, giving the benefit of the doubt to the non-moving party, they made a plausible case that there was something worth looking into.”