The authors' more extensive article on Kennedy v. Plan Administrator for DuPont Savings and Investment Plan was published as a feature story in Michigan Lawyer's Weekly on October 26, 2009.
A recent U.S. Supreme Court decision illustrates the importance of regularly reviewing and updating beneficiary designations. Last year, in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. ____, 129 S. Ct. 865, 172 L.Ed.2d 662 (2009), the Supreme Court unanimously held that a divorce decree that included a waiver of one spouse's rights in the other spouse's retirement benefits under a qualified retirement plan subject to the Employee Retirement Income Security Act (ERISA) was insufficient to cancel or change an existing beneficiary designation.
William Kennedy had worked for E.I. DuPont de Nemours & Company and participated in its savings and investment plan (SIP), an "employee pension benefit plan" under ERISA. In 1974, he signed a form designating his wife, Liv Kennedy, as beneficiary. William and Liv divorced in 1994 and in the divorce decree Liv waived her right to benefits under William's employee benefit plans. Although William did execute a new beneficiary designation for one of his ERISA retirement plans, naming his daughter as beneficiary, he did not change the beneficiary of his SIP. When William died in 2001, his daughter, the executrix of his estate, requested that William's SIP funds be distributed to his estate. DuPont, however, relying on the SIP beneficiary designation form, distributed the $400,000 balance to Liv. The estate sued DuPont and the SIP plan administrator, claiming that the divorce decree amounted to a waiver of the SIP benefits by Liv and that DuPont had violated ERISA by distributing the SIP benefits to her.
The District Court granted summary judgment for the estate but the Fifth Circuit reversed, reasoning that Liv's waiver was ineffective as it violated ERISA's anti-alienation provision. The Supreme Court affirmed the Fifth Circuit decision in favor of DuPont, but disagreed with the analysis of the Fifth Circuit. The Court held that a waiver of pension plan benefits does not constitute an assignment or alienation and, therefore, may be effective under ERISA. ERISA, however, requires a plan administrator to follow the plan documents which, in this case, required distributing plan benefits to a former spouse who was still designated as the beneficiary at the time of the participant's death. Thus, a divorce decree which included a waiver by the former spouse of her rights in her husband's benefits under his employer's retirement plans was not sufficient to cancel the beneficiary designation filed during the marriage. It should be noted that the divorce decree in this case was not a qualified domestic relations order (QDRO), which is a specific type of court order that satisfies certain statutory requirements under ERISA and the Internal Revenue Code. Rights to a spouse's qualified retirement benefits may be effectively waived through a QDRO.
The Supreme Court focused on ERISA's requirement that every employee benefit plan be "established and maintained pursuant to a written instrument," and that ERISA obligates plan administrators to administer an ERISA plan in accordance with the documents governing such plan insofar as such documents are consistent with ERISA. The Court noted that, without such rules, plan administrators could be forced to examine multitudes of documents, contrary to ERISA's statutory scheme of reliance on the face of written plan documents. The Court also noted that any state law which would circumvent a plan administrator's ability to rely on the plan's document (such as Michigan's law revoking disposition of property to a former spouse following a divorce) is pre-empted by ERISA.
For many individuals, assets that pass by beneficiary designation, such as retirement assets and insurance proceeds, represent a greater share of their estate than assets that will be transferred according to the provisions of a will or trust. A regular review of beneficiary designations is, therefore, critical to any estate plan. Even where there has been no divorce or other significant lifetime change, it is a good idea to periodically review beneficiary designations to ensure that assets pass to beneficiaries in a way that maximizes the assets received by such beneficiaries. For example, it generally makes the most sense for spouses to name each other directly as beneficiaries of retirement assets rather than to direct such assets to a spouse through a will or trust. As the direct beneficiary of retirement assets, a spouse may roll the benefits over into an IRA under his or her own name, thus maximizing or "stretching out" the distribution period.
For most plan sponsors, the Supreme Court's decision should simplify plan administration. A carefully drafted plan payment provision will allow the plan administrator to look only at its beneficiary designation records when making payment. Plan sponsors that use a prototype 401(k) plan should carefully review the administrative provisions provided by the prototype sponsor. Some prototype sponsors have included language that automatically revokes a beneficiary designation when a participant becomes divorced. For plan sponsors that don't always know when a participant becomes divorced, this automatic revocation language could complicate plan administration in spite of the Supreme Court's decision.
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