DOL Files Amicus Brief in Support of Companies in 401(k) Plan Forfeiture Complaints

In filing an amicus brief to an appeal involving HP Inc., the Department of Labor offered guidance on an issue that has prompted dozens of new cases this year.

The U.S. Department of Labor filed a legal brief siding with HP Inc. in a dispute over how the company managed forfeited funds within its 401(k) retirement plan. The case, Hutchins v. HP Inc., challenges the legality of HP’s use of unvested matching contributions, a subject which has prompted more than 50 complaints this year under the Employee Retirement Income Security Act.

The lawsuit was filed in 2023 by Paul Hutchins, a participant in HP’s 401(k) plan, who claimed that from 2019 to 2023, the HP Plan Committee improperly used forfeited employer contributions—funds that had not vested when employees departed and were therefore left behind—to satisfy HP’s own matching obligations, rather than to offset administrative expenses. Hutchins alleged it constituted a breach of ERISA. A district court dismissed the case in 2024, and Hutchins appealed to the U.S. 9th Circuit Court of Appeals.

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In its amicus brief filed July 9, the Department of Labor pushed back on Hutchins’ argument, stating that “a fiduciary’s use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA.”

The brief distinguished between fiduciary responsibilities and “settlor” decisions, which relate to the design and funding of benefit plans; such functions are not subject to ERISA’s fiduciary standards. According to the DOL, “funding a plan is a settlor function,” and employers retain discretion in deciding how to cover plan expenses or provide contributions.

Previous IRS guidance also stated that plan sponsors may use forfeited funds to offset future contributions or pay down plan expenses if noted in its plan documents.

The DOL also underscored that fiduciaries must act “with the care, skill, prudence, and diligence” required by ERISA, but asserted that Hutchins’ allegations failed to show a plausible violation. Specifically, the brief stated that the HP Plan Committee’s decision to allocate forfeitures toward matching contributions was both permissible under the plan’s terms and aligned with participants’ interests, because it ensured timely delivery of promised benefits.

In earlier proceedings, the U.S. District Court for the Northern District of California had already dismissed Hutchins’ complaint twice—once with leave to amend and then a second time in February without it. The court ruled that Hutchins’ theory would, if accepted, improperly require fiduciaries to favor administrative cost reduction over benefit funding, a requirement not supported by ERISA.

The DOL echoed this view, noting that Hutchins’ claims “fail to plausibly allege that a ‘proper’ investigation would have led to a different outcome.” The brief also stated that “there is no fiduciary duty to litigate” with a plan sponsor over contribution amounts, especially when participants are receiving the benefits promised under the plan.

The ERISA Industry Committee joined the DOL in the amicus brief.

The 9th Circuit is expected to rule on the case later this year, but the DOL’s position will likely impact the court’s decision and future cases. Daniel Aronowitz, who awaits a full Senate vote to confirm him as the head of the DOL’s Employee Benefits Security Administration, has said he plans to limit ERISA litigation. ERISA experts previously told PLANSPONSOR that amicus briefs from the department are one way to pursue that goal.

The plaintiff is represented by Hayes Pawlenko LLP, and the defendants by Morgan Lewis Bockius LLP.

District Court Sides With Challenges to DOL’s Fiduciary Standards

A judge struck down parts of Prohibited Transaction Exemption 2020-02 that allowed the Department of Labor to treat certain relationships involving IRAs as evidence of a fiduciary role under ERISA.

A federal judge this week ruled partially in favor of a coalition of financial professionals and organizations challenging the U.S. Department of Labor’s interpretation of fiduciary standards under the Employee Retirement Income Security Act. 

In Federation of Americans for Consumer Choice Inc. et al. v. United States Department of Labor et al., U.S. District Judge Ed Kinkeade, in the Northern District of Texas, issued an order on July 9 that accepted the findings and recommendations of a U.S. magistrate judge, who concluded in 2023 that portions of the DOL’s guidance under Prohibited Transaction Exemption 2020-02 exceeded the agency’s authority and were arbitrary and capricious. 

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The plaintiffs—comprised of independent insurance agents, financial planners and industry organizations—argued that the DOL’s reinterpretation improperly expanded the definition of who qualifies as an “investment advice fiduciary” under Title I of ERISA, particularly regarding advice on rolling funds into individual retirement accounts from other retirement plans. 

Following the magistrate judge’s recommendation, Kinkeade struck down parts of PTE 2020-02 that allowed the Department of Labor to treat certain relationships involving IRAs as evidence of a fiduciary role under ERISA. Specifically, the judge rejected the DOL’s attempt to consider a single rollover as the start of an ongoing advisory relationship, the assumption of possible future advice to IRAs and the view that a continuous advisory relationship covering both a workplace retirement plan and an IRA meets the “regular basis” requirement for fiduciary status. Kinkeade found these interpretations went beyond the DOL’s legal authority and were unreasonably applied. 

While Kinkeade denied the DOL’s motion to dismiss the case for lack of jurisdiction, he also granted in part and denied in part various motions for summary judgment. 

The district court’s ruling partially invalidates the DOL’s attempt to regulate one-time rollover advice as fiduciary investment guidance, potentially narrowing the department’s oversight of financial professionals who offer IRA rollover services. 

The U.S. 5th Circuit Court of Appeals, which vacated the DOL’s previous fiduciary rule in its 2018 decision in Chamber of Commerce v. DOL, in April granted the DOL 60 days to consider its stance on the latest version of the rule, called the Retirement Security Rule, which had been scheduled to take effect in September 2024. The DOL, which published the latest rule during the Biden administration, began pursuing the appeal. Following the change in presidential administration, the DOL has not said if it will continue the appeal. The 5th Circuit hears appeals from district courts in Louisiana, Mississippi and Texas and would be the next court to hear any appeals to Kinkeade’s decision. 

A DOL spokesperson was not immediately available for comment on the status of the rule. 

One attorney argued that more of the by upholding much of the DOL’s preamble in the 2020 Prohibited Transaction Exemption the circuit court’s decision raises a host of issues. 

“I do not speak for FACC, obviously, but I would be extremely surprised if FACC did not appeal, and frankly, I would be very surprised if FACC did not win its appeal,” says Kent Mason, a Washington, D.C.-based partner at Davis & Harman LLP, which was not involved in the legal action. “The 2020 DOL preamble was just a transparent effort to turn salespeople into fiduciaries, which the 5th Circuit has found invalid. Clearly, neither the magistrate nor the district judge understood the issues. I read the magistrate’s report, and it is just devoid of logic on key points.” 

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