Handling Your Ex: Tips For Switching 401(k) Beneficiaries


In estate planning, the beneficiary designation usually rules.

But in some cases there's a higher power: federal law. In particular, the Employee Retirement Income Security Act of 1974 (ERISA) rules, when it comes to employer retirement plans like a 401(k).

A worker's spouse generally is the entitled heir to a deceased participant's account.

A recent court decision noted that Congress intended "to provide automatic survivor benefits to the spouses of vested participants."

Spouses can waive those rights. But such a waiver may not be enforceable unless it's done properly.

Considering how frequently marriages end in divorce and subsequent remarriages, plan participants must be vigilant. If you want to leave your 401(k) account to children from a previous marriage, for example, doing so after remarrying may not be easy.

You'll need a proper waiver from your new bride or groom.

According to an advisory council report to the U.S. Department of Labor, the death of an employee participating in a company retirement plan often triggers disputes over who will collect the funds. The worst battles occur after a marriage or divorce, if the worker dies without following through on the beneficiary paperwork.

The case mentioned above illustrates what can happen.

Michael Cox worked for an energy company with a 401(k) plan. Before he married, Cox and his bride to be, Kathy, signed a prenuptial agreement. The agreement included Kathy's waiver of her rights to Michael's 401(k).

But only a spouse can waive this ERISA right. And prenups are signed before the wedding.

Did It Again

So this couple re-executed the agreement after the wedding. Kathy was Michael's spouse when she signed the postnup, waiving her rights again. This was the third time Kathy and Michael had been married to each other.

Fourteen months after this wedding, in the midst of going through a third divorce, Michael died. On his 401(k) beneficiary form, Michael had named his parents as the beneficiaries.

Kathy declined to relinquish money in the account, so the dispute went to court. A district court and a federal appeals court ruled in her favor, so Kathy collected.

Why didn't the prenup-postnup combo work as a waiver? The agreements she signed "failed to inform Kathy -- in clear and express terms -- that she both had a spousal right to receive the funds in the 401(k) plan and that she was waiving this right," the court explained. So Kathy still had a spouse's rights to Michael's retirement.

ERISA allows retirement plans to waive the spousal consent requirement if the worker has been married less than a year.

But the option must be spelled out in the plan and company plans aren't required to include this exception. If the one-year clause is not in the plan documents, even the briefest marriage will trigger spousal rights to the decedent's account.

Workers desiring a spousal waiver should check with their plan administrator to see if the plan has its own waiver documents, says Joe Cicchinelli, a consultant with retirement expert Ed Slott.

A plan's own waiver consent is likely to be cost-free and, drafted properly, enable your survivors to avoid a dispute over who gets your account.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

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