An ERISA-based federal lawsuit filed in August 2024 in the U.S. District Court for the Northern District of Georgia contains allegations that Home Depot breached its fiduciary obligations arising under its employee retirement plan.
The representative plaintiff, who is a participant in the Home Depot Future Builder Plan, alleged that Home Depot, along with its administrative committee, breached their fiduciary duties under ERISA by using forfeited funds within the retirement plan to reduce the company's contributions instead of defraying the plan's administrative expenses.
According to the Plan's terms, a participant in Home Depot's retirement plan is fully vested in the employer's matching contributions after three years of continual employment. However, if a participant has a specified number of breaks in service before full vesting of the employer's contributions, the unvested contributions are forfeited. It is the use of those forfeited funds that is the basis of this lawsuit.
According to the complaint, the company fiduciaries overseeing the plan used their discretionary authority and control over the forfeited funds to benefit themselves at the expense of plan participants who were forced to incur deductions from their individual accounts to pay for costs that the forfeited funds should have covered.
The plaintiffs allege Home Depot's fiduciaries violated ERISA's anti-inurement provision, which mandates that plan assets must be used exclusively for the benefit of participants and beneficiaries. It also alleges maintains that the defendants' use of forfeited funds to defray employer contributions, which saved the company millions of dollars, should count as prohibited transactions under ERISA as they "constituted a direct or indirect exchange of existing Plan assets for future employer contributions and/or a use of Plan assets by or for the benefit of a party in interest." "Home Depot hit with 401(k) lawsuit alleging ERISA violations" www.investmentnews.com (Sep. 03, 2024).
Commentary
This lawsuit is similar to one filed against Siemens, which contained allegations that the German multi-national used forfeited assets to offset its future contributions. Moreover, the U.S. Department of Labor recently settled its suit against Sypris Solutions Inc., a Louisville, KY technology services provider, for failing to follow its written guidelines regarding the use of forfeited funds.
A critical strategy for defeating claims by fund participants is creating and publishing the investment program's goals and objectives. These goals are usually drafted to reflect the factors used to evaluate investment options. This is given to investors to notify them of the chosen fee structure and investment choices. Thus, even if fund managers choose to use more costly plans, have higher fees, are proprietary, or may underperform compared with other benchmarks, the fiduciary duty is not breached due to a fund's poor performance, but it may be breached if the investment plan is not followed.
However, in the forfeited funds cases set out above, it is not the plan fiduciary's choice of investments that was at issue, but something much more mundane and administrative in nature, i.e., proper use of forfeited fund assets.
Legal experts have suggested that companies administering employee retirement plans could minimize their risk of this type of litigation by doing away with vesting schedules altogether or removing discretionary grey areas in plan documents that let them choose between offsetting plan contributions or reducing participant expenses.