Latest Plan Forfeiture Complaint Adds New Angle

The latest 401(k) forfeiture complaint, made following the Department of Labor’s July 9 amicus brief that sided with plan sponsors, offers similar arguments to previous complaints, but adds a new wrinkle: timeliness.

In Castillon v. Aldi Inc., filed in U.S. District Court for the Northern District of Illinois, Eastern Division, the plaintiffs allege that the grocery company breached its fiduciary duties under the Employee Retirement Income Security Act by using participant–forfeited funds to reduce company contributions, rather than pay down administrative fees, which many similar complaints have already argued, to mixed success.

The Department of Labor’s amicus brief was cast as “significant” by legal experts in that it sided with plan sponsors’ ability to use forfeited funds to either pay down plan expenses or offset future contributions. The IRS issued similar guidance in 2023, which is often cited for defendants in plan forfeiture cases.

However, in this latest case, the plaintiffs allege that the defendants violated ERISA by their “consistent failure to exhaust forfeitures timely by year-end, harmed the plan participants.”

The plaintiffs first acknowledge that the plan allows for forfeitures to be used to reduce matching contributions or pay down expenses, then specify that the plan sponsors only used forfeited funds to offset contributions, which the complaint alleges costed participants “millions of dollars.”

To support the new claim based on the timeliness of the sponsors’ actions, the plaintiffs cite 2010 IRS guidance, “Fixing Common Plan Mistakes: Improper Forfeiture Suspense Accounts.” In the guidance, the IRS stated that forfeitures should be used in the plan year the forfeiture occurred in.

According to the complaint, “defendants’ failure to promptly exhaust forfeitures by year end was particularly egregious: Defendants left more than $6 million dollars at year end, causing millions of dollars in damages to the plan in that year alone.”

Despite the new wrinkle, sub-regulatory guidance, old or new—including the DOL’s amicus brief—is given less deference these days following the July 2024 Loper Bright decision that pulled back from the previous Chevron standard of deference. So, while the new argument is relatively untested, courts will ultimately decide the course of forfeiture litigation, which has recently favored plan sponsors.

Aldi’s Retirement Savings Plan had $1.7 billion in assets at the end of 2023 for 63,329 participants, according to its latest Form 5500.