Repled Complaint Alleging Misuse of 401(k) Plan Forfeitures Survives Motion to Dismiss

The U.S. District Court for the Northern District of California declined to dismiss a putative class's first amended complaint against The Clorox Company and the employee benefits committee for The Clorox Company 401(k) Plan (collectively, Clorox), alleging that Clorox breached its ERISA fiduciary duties by using plan forfeitures to offset its non-elective contributions to the plan rather than reducing plan participants' administrative costs. The plaintiff's initial complaint was dismissed without prejudice. On its second review of the case at the motion to dismiss stage, the district court held that the amended complaint sufficiently alleged breaches of the ERISA duties of loyalty and prudence.

To reach its decision, the court reasoned that "Plaintiff's arguments 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." The allegations were "sufficient for the Court to infer that defendants are liable for the misconduct alleged because courts look to motivation for loyalty claims and the thoroughness of an investigation for prudence claims." 

In finding that the plaintiff had adequately pled a duty of loyalty claim, the court pointed to the plaintiff's "specific allegations" regarding the self-interest theory, namely the allegation that: 

Clorox had sufficient cash and equivalents on hand to satisfy its contribution obligations to the Plan. Nevertheless, throughout that period, Defendants consistently based the decision of how to allocate forfeitures solely on Clorox's own self-interests and failed to consider the interests of the Plan and its participants.

The court points to specific amendments by the plaintiff to his duty of loyalty claim (italicized in the judge's decision) as rendering the claim sufficient to proceed to discovery:

At the discretion of Defendants, forfeited nonvested accounts in their fiduciary capacity [sic], forfeitures may be used to either pay the Plan's expenses or reduce the Company's contributions to the Plan. Which of these options would be in the best interests of participants depends on the particular facts and circumstances present at the time of the allocation decision. 
 
Instead of acting solely in the interest of Plan participants by utilizing forfeited funds using forfeitures in the Plan to reduce or eliminate the administrative expenses charged to their individual accounts, Defendants chose to use these Plan assets for the exclusive purpose of reducing its own future Clorox's non-elective contributions to the Plan, thereby saving the Company millions of dollars at the expense of the Plan, which received decreased Company fewer non-elective contributions than Clorox promised to pay the Plan, and its participants and beneficiaries, who were forced to incur avoidable expense deductions to their individual accounts. 

Likewise, the court points to specific amendments to the plaintiff's duty of prudence claim to withstand dismissal, which included an averment that "in deciding how to allocate forfeitures, Defendants utilized an imprudent and flawed process." It also highlighted the plaintiff's new allegations that despite being faced with a conflict of interest, "Defendants failed to undertake any investigation into which option was in the best interest of the Plan's participants and beneficiaries" and "failed to consult with an independent nonconflicted decisionmaker to advise them in deciding upon the best course of action for allocating the forfeitures in the Plan, as a prudent person would have done." 

The court specifically rejected Clorox's argument that language in the plan allows for the allocation of plan forfeitures to offset employer contributions, stating that, "Defendants' argument assumes there is no fiduciary breach, which is yet to be decided. If there is a breach, then abiding by the Plan terms cannot save Defendants." The court also rejected the defendants' reliance on Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014), to argue that the duty of prudence claim should be dismissed, on the ground that the plaintiff's claim was sufficiently "context-specific" because at the time of the decision of how to use plan forfeitures, the defendants "had enough information to know whether their decision was prudent when making a fiduciary decision." For this point, the court cites caselaw for the premise that because the defendants likely possess the facts concerning the investigative process, an ERISA plaintiff need only plead details to "support an inference that the defendant failed to conduct an adequate inquiry."

We previously wrote about a recent wave of plan forfeiture cases and the discrepancy in how these cases are handled, even by the same court. This decision significantly adds to this uncertainty and will likely result in copycat complaints, at least in the Northern District of California. 

President Trump Instructs the Secretary of Labor to Address ERISA Fiduciary Standards for Foreign Investments

President Trump issued an February 21, 2025, executive order (E.O.), "America First Investment Policy," which broadly addresses foreign investment, encouraging foreign investment in U.S. companies by U.S. "allies and partners," but discouraging foreign investment by "foreign adversaries," including the People's Republic of China (PRC). The E.O., among other things, seeks "to restrict foreign adversary access to U.S. talent and operations in sensitive technologies (especially artificial intelligence)." The E.O. also states that "[t]he United States will also use all necessary legal instruments to further deter United States persons from investing in the PRC's military-industrial sector." The E.O.'s "America First" investment policy seeks to advance national and economic security and states, "Economic security is national security."

Of significance to ERISA plans and fiduciaries, the E.O. vows "[t]o protect the savings of United States investors and channel them into American growth and prosperity," to include, "restor[ing] the highest fiduciary standards as required by the Employee Retirement [Income] Security Act of 1974, seeking to ensure that foreign adversary companies are ineligible for pension plan contributions." To implement this directive, the E.O. directs the Secretary of Labor to "publish updated fiduciary standards under [ERISA] for investments in public market securities of foreign adversary companies." 

The E.O. states that the new administration will build on measures related to PRC investments taken by the president in 2020 and 2021 and consider new or expanded restrictions on U.S. outbound investment in the PRC in sectors such as semiconductors, artificial intelligence, quantum, biotechnology, hypersonics, aerospace, advanced manufacturing, directed energy, and "other areas implicated by the PRC's national Military-Civil Fusion strategy." Further, it "will consider applying restrictions on investment types including private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities, from sources including pension funds, university endowments, and other limited-partner investors."

The E.O. does not contain a deadline for the Secretary of Labor to publish updated fiduciary standards, nor does it specify a method for doing so. Insofar as rulemaking is undertaken, it will likely implicate the Department of Labor (DOL) regulation addressing investment duties under ERISA, 29 C.F.R. § 2550.404a-1, which in recent years has been the source of significant debate at the administrative level and in the courts over the proper role of environmental, social, and governance (ESG) factors in investment decision-making. In that ESG debate, the prior Trump administration emphasized the need to select investments and investment courses of action based solely on "pecuniary factors" that advance plan participants' financial return. We will watch to see how DOL responds to the E.O.'s directive, including how its prior analysis of the role of collateral, non-financial factors in ERISA plan investing impacts regulations or guidance implementing the policy objectives outlined in the new E.O.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.