Separation or Divorce: Retirement Accounts

Here’s another common scenario. In a divorce agreement, the wife waives all rights to the husband’s 401(k). He dies shortly after the divorce, forgetting to change the beneficiary designation from his wife. Even in a state like Massachusetts with a revocation-upon-divorce statute relative to retirement accounts, the first wife has a legal right to the proceeds. That’s because the federal retirement law, ERISA, preempts any state revocation-upon-divorce statutes.

Practitioners, therefore, should make clear in their agreement that the waivers are ineffective unless beneficiary designations are changed. And they should follow up with clients in writing reminding them to do so.

Certainly, this one is familiar to many of us. The agreement is approved under which the husband’s 401(k) is to be divided equally with the wife, and she waives rights to the husband’s share. The husband dies after the divorce is final but before the QDRO has been entered by the court. Since the husband never changed the beneficiary designation, pursuant to the “plan document rule,” the purported waiver in the agreement is ineffective, and the ex-wife receives the entire asset. Whether a state law equitable remedy would be effective here is an open question. In any event, practitioners here have a simple lesson: Ensure the draft QDRO is presented to the judge as soon as possible.