It’s not often you see the U.S. Department of Labor jumping into the legal ring to back plan sponsors, but when they do, you know something bigger is at stake than just one plan participant’s gripe. That’s exactly what happened in Hutchins v. HP, Inc., a case that has become a flashpoint over one of the oldest and most misunderstood practices in defined contribution plans: forfeitures.
Let’s get the basics out of the way. Forfeitures happen when an employee leaves a company before fully vesting in their employer contributions. Those unvested dollars go back into the plan and, here’s the important part, they can legally be used to either pay administrative expenses or offset future employer contributions. This isn’t a loophole or a gray area. It’s been standard procedure for decades, blessed by the Internal Revenue Code, Treasury regulations, and, yes, even the ERISA statutes themselves.
But apparently, that’s not enough for the plaintiffs’ bar.
Paul Hutchins, a participant in HP’s 401(k) plan, filed a lawsuit claiming that HP’s use of forfeited funds to offset its matching contributions somehow violated ERISA’s fiduciary duties. Never mind that this practice is disclosed in plan documents, permitted by law, and used across the industry. His theory? That these forfeited funds should have been used to pay administrative fees instead.
The district court in Northern California tossed the case. Rightfully so. But Hutchins appealed, and now the case sits in front of the Ninth Circuit, dragging along with it a parade of copycat class actions aimed at blowing up a half-century of settled law.
Enter the DOL.
In a rare show of unified defense, the Department of Labor, alongside ERIC and other trade groups—filed an amicus brief not just urging the Ninth Circuit to uphold the lower court’s ruling, but warning of the tidal wave of chaos that could follow if it doesn’t. And they didn’t mince words: “The Plaintiffs’ bar cannot get what it wants from Congress, and it cannot get what it wants from the executive agencies, so it has invited the judicial branch to rewrite a half century of settled law relating to forfeitures.”
That’s not legalese. That’s a shot across the bow, and one that had to be fired.
Because if Hutchins wins, every plan sponsor in America suddenly finds themselves on shaky ground. Legal costs skyrocket. Plan costs go up. Forfeiture strategies that were once routine become landmines. And who pays for all that? Participants. Not in theory. In practice. In real dollars that should have gone toward improving plans, reducing fees, or adding benefits.
This case isn’t about protecting participants. It’s about opening the litigation floodgates. It’s about trial lawyers trying to convert standard, lawful plan practices into new revenue streams under the guise of fiduciary breach.
And let’s not forget, these forfeiture practices are disclosed. They’re in the plan documents. They’re reviewed by recordkeepers and ERISA counsel. They’re audited annually. If that’s not enough to insulate plan sponsors from liability, then we’ve crossed into dangerous territory where any fiduciary decision can be second-guessed by hindsight and headline-chasing lawsuits.
The DOL gets this. That’s why they’re taking a firm stance: using forfeitures to offset employer contributions is not a breach of fiduciary duty, it’s a longstanding, permissible practice. And one that, when properly executed and documented, benefits the plan and its participants.
The final paragraph of the DOL’s brief says it best: “The Secretary has a substantial interest in fostering established standards of conduct for fiduciaries by clarifying the Secretary’s view that a fiduciary’s use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA.”
Translation? Let’s not turn every routine administrative decision into a litigation trigger. Let’s not scare plan sponsors out of offering robust retirement benefits. And let’s not let lawyers rewrite the rules just because they don’t like how Congress or the IRS did their job.
The Ninth Circuit has an opportunity here, not just to decide a case, but to restore some sanity to the retirement plan landscape. Here’s hoping they do the right thing. Because ERISA’s not perfect, but it doesn’t need a rewrite from a courtroom. It just needs to be followed as written.
