Greetings—this is Ary Rosenbaum picking up the referee’s whistle to review a recent win for fiduciaries and what it signals for plan-sponsors, TPAs, and compliance teams.
1. What Happened
A federal judge dismissed a lawsuit against Peco Foods Inc. that challenged the company’s practice of using forfeited 401(k) account balances to satisfy employer contribution obligations. The claim: departing participants’ forfeitures were not being used in the “correct” order or for the “right” expense categories. The judge said no violation of the plan document or ERISA fiduciary duties was shown.
2. Why This Matters
In my “Rosenbaum voice” pragmatism: forfeiture-reallocation litigation is a live and growing threat for defined contribution plans. Yet, this case underscores a few key takeaways:
· Plan Document Is King – What the document says governs the outcome. The judge emphasized that fiduciary liability did not automatically arise just because someone questioned how forfeitures were used.
· No Categorical Liability – Even under §404(a) of Employee Retirement Income Security Act of 1974 (ERISA), you’re not liable simply for exercising discretion in forfeiture use. The specifics matter.
· Operational Risk Still There – While this is a win for the defendant, the reasoning leaves open that other plans with less clarity in their documents or more ambiguous execution might still get hit.
3. Three Questions Plan Sponsors, Fiduciaries & Advisors Should Ask
Because yes, this is your “to-do” list (in true Rosenbaum style):
· Does my plan document clearly articulate how forfeitures are allocated? If language is vague (“may apply,” “at the employer’s discretion,” “as determined by the committee”), you’re inviting interpretation risk.
· How is “administrative expense” defined and treated in practice? The Peco decision leans on how the plan defined (or didn’t define) expense categories and whether the fiduciaries followed that order.
· Do our operations match the document? It doesn’t help to have crisp language if your practice diverges. Contractors, record-keepers, audits: all must be aligned.
4. Final Takeaway
For plan sponsors: this decision is encouraging, but not a free pass. In the 401(k)/403(b) space, forfeiture-allocation suits remain among the “hot topics” of fiduciary exposure. The Peco outcome points to the defensive strength of:
· A well-worded plan document
· Clear, consistent operational practice
· Documentation showing fiduciary decision-making aligned with the instrument
Treat forfeitures not just as accounting line-items, but as compliance potential. Make sure your plan docs reflect your operations, your vendor contracts reflect your practice, and your audit/committee materials show you reviewed this.
