As litigation related to ERISA continues to evolve, one emerging trend has been the use of forfeitures to offset employer contributions in retirement plans. Forfeiture occurs when employees leave a company before fully vesting in their employer’s contributions. The unvested portion then reverts to the plan’s forfeiture account and is considered an asset of the plan. However, there has been an uptick in lawsuits alleging that employers breach their fiduciary duty by using forfeited funds to reduce future employer contributions instead of reducing administrative costs, which are often passed on to participants.
To safeguard your retirement plan from potential legal exposure, here are a few key strategies plan sponsors should consider:
1. Review and Revise Your Plan Document
Ensure your plan document clearly outlines how forfeitures will be used. Specify if they can offset employer contributions, pay administrative fees, or be reinvested into the plan for participants. Clarify the priority of forfeiture usage to prevent ambiguity and consider removing discretion for fiduciaries to avoid potential breaches of duty.
2. Enhance Participant Communication
Transparency is key. Clearly communicate how forfeitures are managed, including how they impact both employer contributions and plan expenses. Regular updates and easy-to-understand explanations in your plan documents and summaries will help keep participants informed and minimize confusion.
3. Establish a Monitoring System
Regularly monitor the use of forfeitures to ensure that funds are being allocated correctly and in compliance with your plan’s terms. Periodic audits, even when not required, can help prevent mistakes and mitigate legal risks down the line.
Given the growing scrutiny over forfeiture practices, now is the time to review your plan’s provisions and ensure they comply with ERISA standards.
Our team at Newburg CPA is here to help you navigate these complexities and ensure your retirement plan remains in full compliance. Contact us today!