Clorox Wins 1st Round in 401(k) Plan Forfeiture Lawsuit

A former Clorox Co. employee’s class action complaint over the company’s handling of forfeited 401(k) funds was mostly dismissed, with U.S. District Judge Yvonne Gonzalez Rogers ruling the breach claim under ERISA was “impermissibly broad” in a court document filed November 1.

Rogers gave the plaintiff, James McManus, until November 12 to file a revised complaint, asking for more specific details about the Clorox plan’s circumstances to support his claims of fiduciary imprudence or disloyalty. Rogers referenced the need to show “special circumstances” that impacted fund management, citing a U.S. Supreme Court standard from Fifth Third Bancorp v. Dudenhoeffer.

The plaintiff claimed that Clorox’s method of reallocating forfeited contributions effectively used plan assets to offset the company’s expenses, which he argued was improper under the Employee Retirement Income Security Act. Clorox countered in its motion to dismiss, stating that redirecting forfeitures within the plan itself is allowed.

ERISA’s anti-inurement provision mandates that plan assets solely benefit participants or cover plan costs. Referencing a 1999 decision in Hughes Aircraft Co. v. Jacobson, Rogers noted that incidental benefits to employers do not violate this rule and ultimately dismissed this specific claim, as indirect benefits to Clorox were deemed insufficient grounds to move ahead.

“In those cases, as here, defendants received indirect and incidental benefits from funds to which plaintiff is not entitled under the Plan language,” Rogers wrote. “The Court GRANTS defendants’ motion to dismiss on this ground. As plaintiff indicated on the record that he would not reassert this claim, LEAVE TO AMEND is not granted.”

The ruling is an initial positive for Clorox, one among many recent defendants alleged to have misused plan forfeiture funds.

The Case

The initial complaint in McManus v. The Clorox Co. was filed in October 2023 in U.S. District Court for the Northern District of California by McManus, a participant in the company’s 401(k) plan, alleging the company misused forfeited funds. McManus claimed Clorox improperly applied these funds—totaling about $5.7 million from 2017 to 2022—to reduce company contributions rather than to defray plan costs for participants. In December 2023, Clorox filed its motion to dismiss the case.

Clorox’s defense argued that its use of forfeitures aligned with IRS guidelines and was documented within its plan rules. The company asserted that the allocation of forfeited funds to reduce employer contributions is a well-established practice supported by IRS regulation. Clorox’s lawyers claimed this is consistent with federal guidance and noted that the complaint is part of a larger wave of similar suits.

Using 401(k) plan forfeitures to offset employer contributions has been a longstanding practice permitted by U.S regulators, according to experts. But recent litigation scrutinizing plan fiduciaries’ use of forfeitures under ERISA continues both to be filed and to progress in the courts.

In August, a class action complaint was filed against Bank of America, and two existing lawsuits against Intuit Inc. and Qualcomm Inc. survived district court challenges by the defendant companies. The plaintiff in the Bank of America lawsuit is represented by Haffner Law PC. Meanwhile plaintiffs in the Intuit and Qualcomm cases were Hayes Pawlenko LLP.