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On September 19, 2024, in Dimou v. Thermo Fisher, the United States District Court for the Southern District of California dismissed plaintiff’s claims that defendant plan fiduciaries had violated ERISA fiduciary rules when they used the discretion granted them in the plan to use plan forfeitures to reduce employer contributions rather than to reduce participant-paid plan expenses.
The court’s decision comes just two weeks after a Virginia district court, in Naylor v. BAE Systems, Inc., dismissed plaintiffs’ forfeiture claims under somewhat different facts (in Naylor the court found the fiduciary did not have discretion to use forfeitures to reduce expenses).
In what follows we provide a brief note on the Dimou decision, a summary of current decisions on the forfeiture issue, and some practical takeaways.
Legal background
Forfeiture litigation has generally turned on the application of two ERISA fiduciary requirements:
The duty of loyalty: That a fiduciary must "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.”
The duty to follow the terms of the plan.
While some plaintiffs (e.g., in Naylor)have argued that the duty of loyalty requires that fiduciaries ignore plan provisions requiring the use of forfeitures to reduce employer contributions and instead use them to increase participant benefits/reduce participant expenses, no court has taken that claim seriously.
Thus, the legal issue that is still being worked out by the courts is what to do where the plan grants discretion to plan fiduciaries to use forfeitures either to reduce employer contributions or (participant-paid) plan expenses.
The court’s decision
That was the situation in Dimou. And, as noted at the top, the Dimou court found that the exercise of that discretion to use forfeitures to reduce employer contributions did not violate ERISA.
In reaching that conclusion, the court generally relied on and followed the logic of Hutchins v. HP Inc.: that the allocation of forfeitures in these circumstances is a fiduciary act (rejecting defendants’ argument that it is a settlor function) but that fiduciaries are under no obligation to increase plan benefits to participants. As the Hutchins court reasoned:
Plaintiff’s theory of liability would improperly extend the protection of ERISA beyond its statutory framework. ERISA does not mandate what benefits an employer must provide under a plan and does no more than protect the benefits which are due to an employee under a plan. … Plaintiff is effectively arguing that the fiduciary duties of loyalty and prudence create a benefit: the payment of his administrative costs. … [T]hose provisions [however] “create[] no exclusive duty of maximizing [participant] pecuniary benefits.”
Repeating what we said at the top – this case, and Hutchins, are different from the recent Naylor decision. In Naylor, the court found that fiduciaries had no discretion to allocate forfeitures to reduce participant expenses. In Dimou they did have discretion.
The current state of forfeiture litigation
If we pull out Naylor (because of the lack of discretion in that case) we now have four decisions on this issue. Two holding for plaintiffs (or at least allowing plaintiffs’ claims to survive a motion to dismiss), Perez-Cruet v. Qualcomm Incorporated, US District Court for the Southern District of California (May 24, 2024) and in Rodriguez v. Intuit Inc., US District Court for the Northern District of California (August 12, 2024). And two holding for defendants, Hutchins v. HP Inc., US District Court for the Northern District of California (June 17, 2024) and Dimou v. Thermo Fisher. We discuss Perez-Cruet v. Qualcomm and Hutchins v. HP Inc. in our article Same facts, different results – two courts come to different conclusions in forfeiture litigation.
Takeaways
As we discussed in Naylor, until these conflicting decisions are resolved (e.g., on appeal to the Ninth Circuit), plans with discretionary language, allowing the sponsor/fiduciary to decide whether to use forfeitures to reduce employer contributions or pay expenses that would otherwise be paid by participants, are likely to continue to be a litigation target.
With respect to the past, for sponsors of these plans, the cake is already baked. With respect to the future, however, they will want to review their plan document language on this issue with counsel, to determine whether to substitute mandatory language for (current) discretionary language, where applicable.
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We will continue to follow this issue.