Cigna Group’s 401k has roughly 93,000 participants and $13 billion in assets. The three named plaintiffs will seek to act on behalf of a class of tens of thousands of affected participants.
IRS guidance from 2023 appears to permit this use of plan funds. Plaintiffs argue, however, that this is at odds with the explicit language of ERISA Section 404 that requires plan fiduciaries to manage plan assets prudently for the exclusive benefit of participants and beneficiaries. Federal courts in several jurisdictions have struggled to resolve this contradiction, with varying results.
Adams v. the Cigna Group – one of many
The Adams complaint also levels allegations that the 401k plan’s fiduciaries failed to prudently monitor the use of plan assets, resulting in millions in lost investment gains and additional out-of-pocket expenses for participants. It characterizes the fiduciaries’ conduct as amounting to a series of prohibited transactions, (essentially a form of self-dealing), that served the interests of the company and its management, rather than the interests of retirement savers.
On May 10, Sean Hicks v. The Cigna Group, a very similar lawsuit, was filed in the same district court. The Hicks complaint alleges that in 2020, for example, Cigna allegedly used plan forfeitures to reduce its contribution obligation by roughly $3.2 million while using no forfeitures to offset plan expenses.
That lawsuit was followed on May 14 by Reven v. The Cigna Group 401(k) Plan Retirement Plan Committee, also in the Eastern District of Pennsylvania. As well as alleging that the fiduciaries misallocated forfeitures, Reven claims that Cigna allowed assets to be invested in funds that had “significantly lower rates of return” than comparable funds.
Focus on forfeitures
The forfeiture issue, taken by itself, seems to be a problem of the IRS’s own creation.
Forty years ago, in Revenue Ruling 84-156, the IRS opined that, as long as the plan document clearly permitted it to do so, an employer might use forfeitures to reduce reasonable administrative expenses with any excess to be used to reduce further employer contributions. Plan sponsors promptly added the magic language to their documents.
In 2023, that guidance was more explicitly re-stated in proposed IRS regulations. Defined contribution plans, like Cigna’s 401k plan, may re-purpose forfeitures to:
- pay plan administrative expenses;
- reduce required employer contributions; or
- increase benefits in other participants’ accounts according to plan terms.
Other than the requirement that the plan’s governing documents specifically permit this reallocation, there seem to be few limits or conditions to this power.
On the other hand, ERISA’s “exclusive benefit rule” requires that plan fiduciaries discharge their duties solely in the interest of plan participants and beneficiaries, with the exclusive purpose of providing benefits and defraying reasonable administrative expenses.
This mandate goes back to ERISA’s enactment in 1974. It does not seem to contemplate the explosive growth of individual account defined contribution plans, where administrative expenses are paid directly from participants’ accounts (thus reducing retirement benefits) if they are not paid by the plan sponsor.
There’s a conflict between the two mandates – to provide benefits and to pay administrative costs. Courts are now being asked to determine which one is more important. The decisions have been evolving.
Confusion reigns
Many early forfeiture lawsuits were dismissed at the summary judgment stage, largely on the strength of the permissive provisions of proposed IRS regulations. These include lawsuits against The Kaiser Permanente 401K Plan, Knight-Swift Transportation Holdings Inc. and Capitol One.
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Others have settled, perhaps on a pragmatic “pay to make it go away” strategy. One of the more surprising of these was the recent settlement of a lawsuit against Intuit, Inc. after a District Court permitted five of the six counts against the plan fiduciaries to proceed to trial.
In McManus v. Clorox, a Northern District of California decision allowing plaintiffs to proceed to trial, it is possible to see the court grappling with the apparent contradiction between the plan’s obligation to use plan assets to pay benefits and its freedom to re-allocate forfeitures to reduce its contribution commitment.
Adams takes place in this shifting and somewhat fluid legal environment. It is still very early in the process for this case, but this may be a lawsuit to watch.
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