JPMorgan Chase sued over use of forfeited 401(k) assets

JPMorgan Chase last week became the latest company to be sued over its use of forfeited 401(k) assets, or employer contributions that workers give up when they leave before being fully vested.

Numerous companies have been similarly sued in over a year since the first such cases began appearing. Like in other lawsuits, the lead plaintiff in the new case against JPMorgan alleges that the firm breached its fiduciary duty under the Employee Retirement Income Security Act by using forfeited plan assets to offset future contributions for other workers rather than to reduce expenses for all plan participants.

That line of litigation so far hasn’t been fully tested in court. However, last year a case brought against Qualcomm survived a motion to dismiss, marking the first time such a lawsuit made it past a major hurdle.

The cases have caught plan fiduciaries off guard, as they’ve been doing what they’ve been explicitly allowed to do by the Treasury Department and IRS for years, said Daniel Aronowitz, president of Encore Fiduciary.

“This was always considered to be kosher under the law,” Aronowitz said. “Plan sponsors are doing exactly what the plan document allows. Some courts are finding that you have a choice – and when you have a choice, that’s a fiduciary function.”

In other words, plan documents that give discretion to the 401(k) sponsor in how forfeited plan assets are used may be giving them some liability, at least according to the flood of new lawsuits.

“What is disturbing here to me is that something that has been allowed under the law for years is turning into an [alleged] breach of fiduciary duty,” Aronowitz said. “I see plaintiffs’ lawyers becoming aggressive and changing benefits. A different benefit was never contemplated under these plans.”

JPMorgan Chase declined to comment on the lawsuit, which was filed in US District Court in the Central District of California. The company's plan represented more than $44 billion in assets as of the end of 2023, data filed with the Department of Labor show.

Last year, following the Qualcomm suit’s survival of a motion to dismiss, observers said that the milestone would likely encourage more litigation. If the cases are successful at trial or in securing settlements, it could lead to widespread claims, in the same way that lawsuits over fees have proliferated, one lawyer noted.

A way for plan fiduciaries to handle the issue is to draft plan documents so that they don’t give any choice in how forfeited assets can be used, or for plans to do away with vesting schedules, meaning that plan participants automatically have full ownership of company contributions, lawyers told InvestmentNews.