As permitted by the court, the plaintiffs amended their original complaint and re-filed it in November 2024. Now the participants in the Clorox Company’s 401(k) plan look like they have a chance to show that the plan sponsor breached its fiduciary duty toward them. At long last, it appears that the lawsuit may move toward trial.
Who’s in charge, what comes in and what goes out of a retirement account?
James McManus and others included in the lawsuit were participants in the Clorox Company 401k Plan. The Clorox Company is both the plan sponsor and the administrator of the plan, which gives it considerable discretion in plan management.
The money coming into participant accounts comes from two sources. Participants can choose to contribute part of their salary. In addition, the company contributes money into employee accounts. Participants are always vested in the salary contributions they make to the plan. They always own that money. Company contributions, on the other hand, vest over a period of up to five years. If participants leave before they are vested in the company contributions, the unvested balance is forfeited and goes back into company coffers.
The plan is an individual account plan. One of the consequences of this is that the administrative expenses of running it may be either deducted from individual accounts or paid directly by the administrator.
What happened to the forfeited money?
Between 2017 and 2023, Clorox consistently chose to use the forfeited money to satisfy its own existing contribution obligation rather than to pay administrative expenses.
It is almost always in the participants’ best interest to use the forfeited contributions to pay administrative expenses. It is always in the company’s interest to use the money to offset its otherwise required contributions.
This ERISA lawsuit is about what Clorox chose to do with the forfeited money.
Conflicting rules?
Section 404 of ERISA outlines the key responsibilities for employee benefit plans and their fiduciaries. It mandates that fiduciaries act solely in the interest of participants and beneficiaries, prioritize their interests, and exercise care, skill, prudence, and diligence when managing plan assets and making decisions.
On the other hand, IRS rules permit employers to use forfeitures to reduce employer contributions. That guidance was more explicitly re-stated in proposed IRS regulations. Defined contribution plans may re-purpose forfeitures to:
- pay plan administrative expenses;
- reduce required employer contributions; or
- increase benefits in other participants’ accounts according to plan terms.
The Clorox 401k plan document also explicitly permits the administrators to use forfeited contributions in this way.
“Just because you can, doesn’t mean you should”
That voice in the back of your head may sound like your mother, but in the second time around for McManus, that message is from the California District Court.
Note the difference between the language of Section 404 and the language of the IRS rules. The first is mandatory; fiduciaries must act solely in the interest of participants and beneficiaries with care, skill, prudence and diligence. The language of the regulations is permissive; fiduciaries may use forfeitures to reduce their contributions.
Shocking numbers and an (allegedly) flawed process
The amended complaint (unlike the first one) lays out in explicit detail how much the fiduciaries saved Clorox by using forfeitures to reduce the company’s required contribution. Over the seven years in question, the benefit to the company totaled $6,709,000. At the same time, participant accounts were charged roughly $7,723,000.
While Clorox’s decision to reallocate all forfeitures to reduce its contributions benefited the company, it harmed participants because their accounts were used to pay administrative costs that could have been covered by forfeitures.
Participants lost a lot of the money they planned to retire on.
In its decision, the court acknowledges that there are circumstances in which a choice to use forfeitures to pay plan expenses might be in the best interest of plan participants as well as the plan sponsor. This might occur, for example, if the company would not otherwise have sufficient funds to make required contributions or pay expenses.
If the company were strapped for cash, it might actually work out better for participants to allow it to use forfeitures to keep the plan alive. That does not appear to be Clorox’s situation.
READ MORE ERISA VIOLATION LEGAL NEWS
The amended complaint alleges that the company did not investigate whether there was a risk that Clorox would be unable to satisfy its contribution obligations if forfeitures were used to pay plan expenses. Neither did it consult with an independent nonconflicted decisionmaker on the best course of action, weighing both the company’s and the participants’ interest.
Allegations are not evidence
To be fair, this is not a dispute that can be resolved without hearing both sides. Are the participants’ numbers accurate? Were there other circumstances? Did Clorox engage in some thoughtful process about balancing the company’s interest and the participants’ interests?
This is why the District Court has now given McManus v. Clorox the “go ahead” for trial. This is what courts are for. ERISA retirement savers wait to see what happens next.
Source link
