A recent Court of Appeals case highlights the importance of carefully following the beneficiary instructions in your 401(k) plan. Gelschus v. Hogen, No. 21-3453, (8th Cir. Aug. 29, 2022). Here’s what happened in that case.
Sally Hogen was a participant in Honeywell International Inc.’s 401(k) plan. She originally designated her husband Clifford as the sole beneficiary of her 401(k) account in the event of her death. But Sally and Clifford divorced in 2002, and their marital termination agreement (MTA) said Sally would keep her 401(k) monies “free and clear” of any claim on the part of Clifford.
In 2008, Sally submitted a change-of-beneficiary form to Honeywell. However, she failed to comply with the plan’s requirement that any allocation among beneficiaries be in “whole percentages.” Instead, she specified that her three siblings would each get 33 1/3% of her 401(k) account balance in the event of her death. Because Sally did not use whole percentages, Honeywell did not change her beneficiary designation. Honeywell notified Sally of its rejection of her beneficiary change form. It also sent her eleven annual statements showing Clifford as the sole beneficiary. But Sally took no further action.
Sally died in 2019 with nearly $600,000 in her 401(k) account. Honeywell paid this amount to Clifford because he was still Sally’s named beneficiary. The Personal Representative of Sally’s estate sued Honeywell for breach of fiduciary duty by failing to remove Clifford as a beneficiary and by distributing Sally’s account balance to him. The Personal Representative also sued Clifford for breach of the MTA and unjust enrichment. To show the intent of the MTA, the Personal Representative offered evidence that the couple’s relationship was not amicable; that Clifford had wanted to keep in touch with Sally, but she told him she did not want to; that the two only had one communication after the divorce, and it was about a tax matter; and given Sally’s nearly two decades of avoiding Clifford after the divorce, it was clear she never intended the MTA to provide Clifford with the funds in her 401(k) account.
Nonetheless, the federal district court ruled that Honeywell did not breach any fiduciary duty by paying Sally’s 401(k) account balance to Clifford. The district court reasoned that Honeywell complied with the rule under the Employee Retirement Income Security Act (ERISA) that plans must be administered in accordance with their terms. The district court further ruled that the Personal Representative lacked standing to sue Clifford for breach of the MTA and for unjust enrichment, which effectively meant that Clifford could keep the money. The Personal Representative appealed.
The Eighth Circuit Court of Appeals agreed with the district court that Honeywell did not breach any fiduciary duty by distributing the 401(k) account balance to Clifford. Rather, Honeywell did what it was required to do under ERISA, which was to administer the plan in accordance with its terms, including the plan’s provisions on naming a beneficiary. But the Eighth Circuit disagreed with the district court on the standing issue, concluding that the Personal Representative DID have legal standing to pursue a claim against Clifford for breach of the MTA and for unjust enrichment. However, a jury would need to decide those claims. Therefore, the Eight Circuit remanded the case to the district court for further proceedings consistent with its rulings.
The point of this post is that (i) you should endeavor to have a valid beneficiary designation on file with your 401(k) plan at all times, and (ii) if you marry or divorce, you should revisit your beneficiary designation to ensure it still comports with your wishes. Otherwise, following your passing, there is likely to be costly, derisive, and destructive litigation over the funds, leaving little to your actual INTENDED beneficiary(ies).
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