What employees should do when employer faces 401(k) ERISA class actions

More than 30 class actions have been filed since the fall of 2023 alleging that the use of 401(k) forfeitures to offset future employer contributions violates ERISA, and that reality matters for participants’ balances, recovery rights and administrative choices. Hklaw summarizes the wave bluntly: “Since the fall of 2023, plaintiffs have filed more than 30 class action lawsuits alleging that the use of 401(k) forfeitures to offset future employer contributions violates several Employee Retirement Income Security Act (ERISA) provisions, including the fiduciary duties of loyalty and prudence and ERISA's anti-inurement provision. Plaintiffs have also alleged that this practice constitutes a prohibited transaction under ERISA.”

What the plaintiffs are arguing — and why it matters to you Plaintiffs' core theory in the forfeiture cases is straightforward: using forfeited employer contributions to reduce future employer contributions, instead of using those forfeitures to benefit participants, prioritizes the employer’s financial interest over participant interests. As Hklaw puts it, “Plaintiffs essentially argue that using forfeitures to offset future employer contributions prioritizes the employer's financial interests over the best interests of plan participants and thus violates ERISA.” They also press anti-inurement claims, arguing that such offsets cause plan assets to “inure” to the employer’s benefit — a legal label that, if accepted by a court, can trigger remedies and damages.

At the same time, there is a countervailing regulatory posture: Hklaw notes a U.S. Department of the Treasury guidance acknowledging the propriety of using forfeitures to offset employer contributions and points to the decades-long practice of doing so. The result is an unsettled legal landscape where “despite clear guidance from the U.S. Department of the Treasury acknowledging the propriety of using 401(k) forfeitures to offset future employer contributions and the decades-long practice of doing so, plaintiffs have gained traction with some courts on this novel theory.” For an employee, that means a practice that looked routine can suddenly be the subject of litigation with unclear outcomes.

Quick definitions and mechanics you should know

• Forfeitures: “Under ERISA, participants in defined-contribution plans are always fully vested in their own contributions. However, this is not necessarily so with employer contributions, which may be subject to a vesting schedule. Forfeitures typically occur when an employee leaves a company before becoming fully vested in employer contributions in the 401(k) plan made on the employee's behalf.” That definition, from Hklaw, explains why forfeiture pools exist in nearly every large plan and why their use is an administrative choice a sponsor makes.

• Different litigation tracks: Not all recent 401(k) litigation concerns forfeitures. The Lyon Firm documents fee- and self‑dealing cases that allege poor investment selection, excessive fees and the promotion of proprietary funds — examples that show a broader litigation environment beyond forfeiture theories.

High-profile examples that illustrate the stakes Two employer examples from The Lyon Firm put scale on the problem: “Over 60,000 workers filed a recent class action lawsuit against Morgan Stanley. The suitclaims that the company mismanaged its own employees’ retirement plans by offering poorly performing funds and charging excessive 401k fees.” The Lyon Firm also cites a complaint against L Brands: “An L Brands 401(k) plan participant filed a class action lawsuit against the retailer, alleging the company breached its fiduciary duties in the management of the retirement plan.” Those cases highlight that allegations range from fund performance and excessive expense ratios to choices over share classes and use of proprietary investments.

Fees matter — and the numbers are simple to compare The Lyon Firm flags expense ratios as a critical metric: “Many funds have an expense ratio of 0.20% or less, while others charge above 1%, which will quickly add up and limit the capital growth expected.” For participants, even a few tenths of a percent in annual fees compound over decades. When a plan is sued for fees or share‑class selection, plaintiffs are often pointing to precisely these differences as evidence that fiduciaries failed to act prudently.

What employees should do now — an action plan grounded in the current record Because the legal landscape is unsettled and class notices will follow different litigation tracks, take these practical, verifiable steps:

• Watch for and read any official class notice or settlement notice you receive. The original guidance fragment warned that retirement litigation "can directly affect employees’ retirement savings, their rights to recover losses, and the administrative actions they must take (for example, filing claims or choosing to opt out of a class)." Notices will describe your options and deadlines — don’t discard them.

• Obtain your summary plan description (SPD) and the plan document. Hklaw specifically advises plan-level review: plan sponsors “should implement risk mitigation strategies now. This includes at a minimum, evaluating their plan's forfeiture terms and ensuring that the use of plan forfeitures is consistent with plan terms.” As a participant, look for the forfeiture provision and how forfeitures are allocated in your plan.

• Check your statement for forfeiture-related language or allocations. If your employer reports a forfeiture account or shows reduced employer contributions that correlate to forfeiture use, flag that detail when you talk to HR or the plan administrator.

• Compare expense ratios and investment options. Use the Lyon Firm's thresholds as a quick screen: many funds have expense ratios at or below 0.20%; ratios above 1% are a red flag cited by plaintiff firms. If your plan's lineup leans toward higher-cost share classes or proprietary funds, that could be material to any fee/self-dealing litigation.

• Ask HR or the plan administrator for a plain-English explanation. Request how forfeitures are used (offset future employer contributions, pay plan expenses, or reallocate to participants) and whether recent plan amendments affected that practice. Employers are required to provide plan documents on request.

• Consult independent counsel before making class decisions if you believe you have a significant stake. The sources make clear litigation strategies and remedies differ by claim type (forfeitures vs. fee/self-dealing), so legal advice helps weigh the value of participating in a recovery versus opting out.

What employees should not assume Do not assume that Treasury guidance or historical practice guarantees a dismissal of claims. Hklaw warns that “despite clear regulatory guidance, recent class actions allege a new liability theory” and that plaintiffs have had some early success in courts. Likewise, don’t assume every high plaintiff count means an imminent recovery; The Lyon Firm’s report that “Over 60,000 workers filed a recent class action lawsuit against Morgan Stanley” signals scale but does not disclose outcomes, settlements, or damages.

What plan sponsors are being told — and why employees can leverage that Hklaw’s direct advice to fiduciaries is useful to participants: “Given the infancy of these novel theories and a largely unsettled legal landscape, it is paramount for plan sponsors and fiduciaries to implement risk mitigation strategies now. This includes at a minimum, evaluating their plan's forfeiture terms and ensuring that the use of plan forfeitures is consistent with plan terms.” If you’re an employee asking HR questions, cite that guidance: it reframes forfeiture use as a governance item that fiduciaries should be able to explain and document.

A final point on posture and outlook The current mix of litigated theories — forfeiture-offset suits on one hand and fee/self-dealing suits on the other — means vigilance is the appropriate stance for participants. The litigation is novel in parts and large in others: more than 30 forfeiture suits since fall 2023 have changed what previously felt like routine plan administration into potential litigation exposure, while massive fee suits like the Morgan Stanley action show how quickly participant counts can grow. Read notices, obtain plan documents, compare fee metrics, and ask for explicit answers from your plan fiduciaries. The legal landscape remains unsettled, and the actions you take now determine whether you preserve recovery rights or miss critical deadlines.