Opportunity comes in many forms, and for creative litigators, more of it may be coming from the ways large employers use forfeitures from their 401(k) and 403(b) plans.  

We’re seeing more cases that hinge on whether employers uphold their duty of loyalty to plan participants based on ambiguous language in plan documents and insufficient meeting notes. The Clorox case currently underway gives a good example—and a way forward for prudent employers.  

McManus v. The Clorox Company is a California case claiming Clorox improperly used forfeitures to offset company contributions, violating ERISA, and “depriving the Plan of funds that otherwise would have benefitted plaintiff and other participants.” 

The suit was dismissed in November 2024 for being “impermissibly broad,” after which the plaintiff filed an amended complaint. New facts about Clorox’s decision-making process cast enough doubt on whether the company met its duties of loyalty and prudence that the case will proceed, per a March 2025 ruling.  

It’s worth pausing here to note that this case is one of four similar cases filed last fall by just one firm. There’s an important warning inherent in that fact, and a simple way to avoid finding yourself in Clorox’s position.  

There’s still a lot of case ahead: Judge Rogers simply has denied Clorox’s motion to dismiss, and doing so merely acknowledges that McManus’s claim is plausible. That plausibility comes in part from new evidence that Clorox could satisfy its contribution obligations without dipping into forfeitures.  

Clorox had a choice about how to use forfeitures, the complaint alleges, and it chose to act in its own self-interest.  

Even that could have been defensible with adequate documentation about how Clorox came to its decision for using those funds. However, according to the complaint, Clorox did not adequately investigate which use of funds was appropriate, nor did they consult an impartial decision-maker. You might see where I’m going with this: Loyalty and prudence mean not just examining the options but also taking careful notes along the way. You have to not only do the work, you have to show your work—just like in algebra class.  

An employer has the right to apply forfeitures to plan expenses, use them to offset employer contributions, or return them to participants. How you make those decisions depends on your plan document, which tend to be ambiguous so that employers have flexibility to pivot according to the demands of any given year.  

That ambiguity comes with certain responsibilities. Every employer has a duty to prioritize participants’ best interest over their own—which doesn’t create one right decision in most cases but does make documenting the decision-making process critical. The Clorox case will continue because the company failed to follow best practices: they didn’t conduct an investigation, bring in a consultant, or document decision-making.  

Doing those exact things puts you in a better place to defend any forfeiture decision. I recommend strongly that employers follow these best practices:  

Clorox can’t show any of that work, the complaint alleges, and it is in the hot seat as a result.  

Given the three options for applying forfeitures, most companies choose to offset employer contributions. As a show of good faith, however, applying some percentage of those funds to participant accounts can go a long way.  

Carrying a large balance is unwise, and employers are expected to deplete forfeiture accounts by the end of the year after the year in which the forfeiture occurred.  An audit report that shows funds were used only to offset contributions could be a gift to energetic litigators poring over these publicly available documents. Redistributing a portion of forfeitures back into participant accounts or using a portion to offset plan expenses that would otherwise be paid by participants dramatically weakens any potential claim against loyalty and prudence.