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A California federal judge dismissed a proposed class action accusing HP Inc. of unlawfully using former employees' forfeited 401(k) funds to satisfy its own contributions. The judge found no federal benefits law mandating the company to use the funds to cover plan expenses. In an order issued Monday, U.S. District Judge Beth Labson Freeman granted HP's motion to dismiss current plan participant Paul Hutchins' Employee Retirement Income Security Act (ERISA) suit. Despite Hutchins presenting a "novel legal theory," his allegation that using forfeited funds to reduce employer contributions breached fiduciary duties of loyalty and prudence was not upheld.

HP Escapes 'Novel' 401(k) Suit over Forfeiture usage : Judge's Findings

"Plaintiff's claims are so broad, he is effectively arguing that the fiduciary duties of loyalty and prudence create a benefit: the payment of his administrative costs," Judge Freeman said. "However, the plan does not provide any such benefit, and plaintiff does not allege any facts showing that he is entitled to such a benefit." Hutchins sued the information technology company and its plan committee in November. According to the suit, HP's 401(k) plan is funded through a mix of wage withholdings from plan participants and company contributions deposited into the plan's trust fund. Participants become fully vested in the company's contributions after three years.

Allegations Against HP

Hutchins alleged that a prudent, loyal fiduciary would have used the unvested funds from workers who leave before the three-year vesting period to lower plan participants' expenses, which totaled over $2 million in 2021. Instead, HP used the funds to defray its own contribution costs. He sought to represent a class of all participants and beneficiaries who invested in the plan from Jan. 1, 2019, through the date of judgment, estimating about 30,000 eligible class members.

HP Escapes 'Novel' 401(k) Suit over Forfeiture usage : Legal Basis and Decision

In her order, Judge Freeman stated Hutchins was attempting to extend ERISA beyond its bounds, contrary to Congressional and Treasury Department intentions for defined contribution plans. She noted that both entities have said plan forfeitures can be used as HP chose to use them, rendering Hutchins' claims implausible. However, Judge Freeman allowed Hutchins the opportunity to amend his complaint within 30 days to potentially show disloyalty based on more specific facts or special circumstances. Hutchins also alleged HP engaged in a prohibited transaction by using the funds to pay off its own contributions, but Judge Freeman disagreed, citing a U.S. Supreme Court decision that payment of benefits is not a transaction under ERISA's prohibited transaction provision.

Broader Context and Related Cases

Hutchins' suit is part of a series of recent cases alleging ERISA violations through the use of forfeited 401(k) funds. As of April, at least nine proposed class actions were pending from 401(k) plan participants accusing employers of misusing forfeitures by reducing expenses on required contributions to individual workers' accounts instead of lowering plan fees. Companies named in these suits include Honeywell, Clorox, and Mattel, which filed a motion to dismiss last week.