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The Clorox Co. must defend itself against a proposed class action alleging it misused forfeited 401(k) funds to offset its own contributions instead of reducing plan participants' costs. A California federal judge ruled Monday that the claims had enough merit to proceed, dealing a blow to Clorox’s attempt to escape the lawsuit.

Judge Rejects Clorox’s Dismissal Bid

U.S. District Judge Yvonne Gonzalez Rogers denied Clorox’s motion to dismiss, siding with former employee and lead plaintiff James McManus. The judge acknowledged that while McManus’ amended complaint, filed in November, was "sparse," it sufficiently alleged that Clorox violated the Employee Retirement Income Security Act (ERISA) by prioritizing its own financial interests over those of its plan participants.

"Plaintiff’s argument that defendants were motivated solely by self-interest and conducted no reasoned and impartial decision-making process is plausible given that no other justification is readily apparent," Judge Gonzalez Rogers wrote. "This is sufficient for the court to infer that defendants are liable for the misconduct alleged."

Allegations of Fiduciary Breach

McManus, who participated in Clorox’s 401(k) plan, originally sued the consumer goods giant in October 2023. His lawsuit contends that Clorox had the authority to use forfeited 401(k) funds—left behind when employees departed—to lower plan expenses for participants. Instead, the company allegedly funneled the funds toward reducing its own employer contributions, saving millions at employees' expense and violating ERISA.

After Clorox moved to dismiss the case, Judge Gonzalez Rogers initially granted a partial dismissal, requiring McManus to strengthen his claims. In response, McManus filed an amended complaint in November, arguing that ERISA mandates fiduciaries to act in plan participants' best interests when deciding how to use forfeited funds. Because Clorox failed to engage an impartial decision-maker or prioritize participants, it breached its fiduciary duties of loyalty and prudence, he alleged.

Clorox's Defense Falls Flat

Clorox countered in December that McManus' theory was too broad, suggesting that if his argument held, nearly every retirement plan could be accused of wrongdoing. However, Judge Gonzalez Rogers dismissed that reasoning, emphasizing that just because multiple companies might be engaged in similar conduct does not invalidate McManus’ specific claims.

"Plaintiff sufficiently pleads context-specific claims that defendants had enough information to know its decision was imprudent to meet the plausibility threshold," the judge wrote.

She also rejected Clorox’s assertion that its actions complied with plan terms, stressing that fiduciaries cannot sidestep ERISA simply because a plan document permits certain actions. "If there is a breach, then abiding by the plan terms cannot save defendants," she concluded.

Legal Battle Continues

A Clorox spokesperson declined to comment on the ruling Tuesday. Attorneys representing McManus did not immediately respond to requests for comment.

McManus is represented by Matthew B. Hayes and Kye D. Pawlenko of Hayes Pawlenko LLP.

As the lawsuit moves forward, Clorox faces mounting scrutiny over its handling of employee retirement funds—a case that could set a significant precedent for 401(k) fiduciary responsibilities nationwide.