For years, forfeitures were treated like found money in 401(k) plans. Someone leaves before vesting, the plan keeps the unvested employer contribution, and no one loses sleep.
Then came the lawsuits.
Plaintiffs have begun challenging how forfeitures are used—particularly when they’re applied to offset employer contributions instead of paying plan expenses. Suddenly, something that felt routine is being reframed as a fiduciary breach.
Here’s the reality: forfeitures are not inherently bad. ERISA permits them. The IRS permits them. Most plans are designed to use them. But how you use them—and how well your plan documents support that use—matters.
The fiduciary risk isn’t in having forfeitures. It’s in:
· Ignoring plan language
· Failing to apply forfeitures consistently
· Letting forfeitures accumulate without a clear purpose
· Never revisiting the decision
If forfeitures reduce employer contributions, sponsors should be prepared to explain why that approach makes sense for participants and the plan as a whole. If they pay expenses, sponsors should ensure that’s clearly authorized and properly documented.
This isn’t about panic. It’s about attention.
Forfeitures are a perfect example of an ERISA truth: permitted does not mean protected. Protection comes from clarity, consistency, and documentation.
In today’s litigation environment, anything that quietly benefits the employer deserves a second look—not because it’s wrong, but because it needs to be defensible.
Free money has strings attached. Fiduciaries ignore them at their peril.
