Coca-Cola Southwest Faces Lawsuit Over Forfeitures, Target-Date Funds

Former participants of Coca-Cola Southwest Beverages LLC’s 401(k) plan have filed a complaint against the soda distributor, alleging a breach of fiduciary duties under the Employee Retirement Income Security Act for offering “underperforming” target-date funds and mismanaging forfeited 401(k) funds.

In Ware et al. v. Coca-Cola Southwest Beverages LLC, filed in U.S. District Court for the Northern District of Texas, the former participants accused Coca-Cola SW, a bottling company owned by Mexico-based Arca Continental, of offering a suite of pricey J.P. Morgan TDFs, which they claimed underperformed relative to comparator TDFs and indexes.

In 2018, the 401(k) plan held more than $204 million in the J.P. Morgan TDFs, and by the end of 2020, the plan held more than $234 million in TDFs, according to the complaint. The plaintiffs, represented by law firms Ward + White PLLC and Capozzi Adler PC, alleged that with such a large amount invested in the target-date series, the plan “would have been able to choose virtually any available target date series for the plan.”

The J.P. Morgan TDFs were the only target-date investing options available in the plan until November 17, 2021.

The complaint cites Morningstar’s Lifetime Moderate Index to show that J.P. Morgan SmartRetirement target-date funds did not perform as well as other TDF suites offered by American Funds, MFS, Mutual of America and T. Rowe Price.

“By choosing or continuing to include the JPMorgan TDFs in the plan despite the clear evidence that the funds had a flawed investment strategy as evidenced by the series’ performance for many years, … it deprived Plan participants of meaningful returns costing them millions of dollars in retirement savings needlessly,” the complaint states.

The plaintiffs further argue that participants were charged “unreasonable fees” for the TDFs, with each having an expense ratio of at least 0.75%, higher than comparator funds.

The Coca-Cola Southwest Beverages 401(k) plan has more than $543 million in assets and serves 10,776 participants, according to its most recent Form 5500 filing.

In addition, plaintiffs accuse Coca-Cola SW of misusing the plan’s forfeited funds for its own benefit by using them to reduce future company contributions to the 401(k) plan, instead of not allocating the funds to participants’ accounts.

“Based on the fact that in 2019, 2021 and 2023 the amount of offset exceeded the balance of the forfeiture accounts, it is likely the company used forfeiture funds from prior years to offset company contributions,” the complaint states. “This is a violation of IRS and general ERISA requirement that forfeitures are to be exhausted during the year in which they are incurred.”

In the last several months, numerous similar lawsuits have accused a variety of employers of improperly allocating forfeited funds—or unvested 401(k) money from terminated employees—and using them toward future contributions. However, according to the IRS, which reaffirmed its position in 2023, 401(k) plan forfeitures can be used for any of three permitted purposes: to pay plan expenses, to reduce future employer contributions or to make an additional allocation to participants. 

Manufacturing company Siemens Corp. last week filed a motion to dismiss a forfeiture allegation filed against the firm in August, arguing that Siemens’ actions caused no injuries and are in line with plan terms and the opinions of federal regulators.

A federal court in California also recently dismissed a forfeiture case against Thermo Fisher Scientific Inc., because the allegations were “too broad to be plausible.”

In the Coca-Cola SW case, the plaintiffs allege breaches of the fiduciary duties of prudence and loyalty, as well as a breach of ERISA’s anti-inurement provision. The plaintiffs are seeking an order requiring the company to disgorge all profits received from, or in respect of, the plan and/or equitable relief, as well as actual damages in the amount of any losses the plan suffered to be allocated to participants’ individual accounts.

Cola-Cola SW did not immediately respond to a request for comment. Information on representation for the company was not immediately available.