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Compliance June 13, 2024
Wells Fargo Targeted in New 401(k) Forfeiture Lawsuit
A former employee alleges that the San Francisco-based company violated its fiduciary duties by using forfeited plan assets to reduce future employer contributions.
Reported by Remy Samuels
Continuing the trend of employers facing scrutiny for using 401(k) plan forfeitures to reduce employer contributions, another lawsuit was filed, this time targeting the Wells Fargo & Co. 401(k) plan.
A former employee and participant of the plan, Thomas Matula Jr., represented by law firm Haffner Law PC, has accused Wells Fargo HR committee of violating the Employee Retirement Income Security Act and misusing the 401(k) plan assets for the company’s own benefit, instead of for the benefit of participants.
The case, filed in U.S. District Court for the Northern District of California on June 11, is represented by a different law firm than some of the previous forfeiture cases, which were largely represented by Hayes Pawlenko LLP.
Matula claimed that the company has “wrongfully and consistently” used forfeited, or nonvested, plan assets for its own benefit, to reduce further employer contributions, rather than allocating forfeited funds to participants’ accounts.
However, in the plan’s 2022 Form 5500 filing, it states, “When a participant terminates employment or becomes disabled, he or she is entitled to distribution of his or her total vested account balance. The nonvested portion is forfeited and serves to reduce future employer contributions, pay plan administrative expenses, or make corrective adjustments to participants’ accounts.”
Forfeitures used to offset employer contributions were approximately $2,020,000 for the year ended December 31, 2022, according to the 5500.
The complaint further alleged that the company failed to engage in a “reasoned and impartial decision-making process in deciding to use the forfeited funds in the plan to reduce the company’s own contribution expenses.”
Meanwhile, the IRS reaffirmed its position on the use of forfeitures in 2023, stating that forfeitures can be used for any of three purposes: to pay plan expenses, to reduce employer contributions or to make an additional allocation to participants.
In addition, according to Groom Law Group, the use of forfeitures to offset employer contributions is a longstanding practice explicitly permitted under the Department of Treasury’s regulations and consistent with guidance from the Department of Labor.
The DOL has not previously expressed any general concerns about forfeitures, except in a case last year where it successfully sued plan sponsor Sypris Solutions for applying forfeitures to reduce employer contributions in violation of a plan provision that required that the forfeitures first be applied toward plan expenses. This is consistent with IRS rules, because it states under Title 1 of ERISA that fiduciaries must administer plans in accordance with the terms laid out in the plan document.
Other recent lawsuits surrounding forfeitures have been filed against Qualcomm Inc., Thermo Fisher Scientific Inc., Intuit Inc. and Clorox Co.
The Wells Fargo lawsuit was filed against the human resources committee of the board of directors and the employee benefits review committee. The former employee seeks that all assets and profits secured by Wells Fargo as a result of each ERISA violation described in the suit are disgorged and the removal of the fiduciaries who have breached their fiduciary duties.
Wells Fargo did not respond immediately to a request for comment.
