Wells Fargo Sued by Participants over Misuse of 401(k) ‘Forfeited’ Funds
A former employee alleges that the bank used assets forfeited by former workers for its own financial benefit instead of for plan participants.
Wells Fargo was sued last week by a former employee for allegedly misusing forfeited funds in its 401(k) plan, in a recent uptick of forfeiture lawsuits continuing the trend of employers facing scrutiny for using 401(k) plan forfeitures to reduce employer contributions.
Former employee Thomas Matula Jr. is alleging that the Wells Fargo & Company 401(k) plan violated the Employee Retirement Income Security Act (ERISA) and “wrongfully and consistently” misused 401(k) plan assets for the company’s own benefit instead of for the benefit of participants, in a proposed class-action lawsuit in California federal court. Plan assets “have been wrongfully diverted out of the plan,” according to the suit.
Wells Fargo used $2,020,000 in forfeited plan assets—those forfeited by employees leaving the company before becoming fully vested in the plan—to reduce its own contributions for year ended December 31, 2022, citing a Form 5500 filing in the suit. The lawsuit further alleges a breach of fiduciary duty and a failure to monitor plan fiduciaries.
Similar 401(k) forfeiture fiduciary breach lawsuits under ERISA—questioning the use of forfeited assets to reduce employer contributions in 401(k) plans—have been filed against Thermo Fisher Scientific, Tetra Tech, Honeywell, HP, Mattel, and Intel. Intuit, Clorox, and Qualcomm have filed motions to dismiss similar lawsuits, arguing that participants suffered no injury, having received all the contributions required by the plan; however, Qualcomm’s dismissal suit was recently denied.
The recent spate of forfeiture suits began with a Department of Labor (DOL) lawsuit against a tech company, which challenged how the plan sponsor used plan forfeitures. The case was settled in 2023; however, the plan terms required using forfeitures to lower plan expenses before using them to reduce employer contributions, according to the DOL’s complaint.
The IRS proposed regulations in 2023 providing guidance as to when forfeitures may be used: (1) to pay plan expenses; (2) to reduce employer contributions; or (3) to make an additional allocations to participants. Often, the forfeited employer contributions go into a pooled account in the plan called the “forfeiture account.”
The recently passed SECURE 2.0 legislation directed the DOL to examine ways to improve plan information, and the DOL is expected to report to Congress with recommendations by 2025.
From: BenefitsPRO