Employer Didn't Breach Fiduciary Duty When 401(k) Beneficiary Designation Was Deficient

​An employer did not breach its fiduciary duties in failing to remove a former spouse as beneficiary and distributing 401(k) benefits to him when the employee failed to properly change her beneficiary designation, the 8th U.S. Circuit Court of Appeals decided.

The employee originally designated her husband as the sole beneficiary of her 401(k) plan. When they divorced in 2002, the marital termination agreement (MTA) to which both parties agreed called for the employee to be awarded—free and clear of any claim on the part of her ex-husband—all of the parties' right, title and interest in and to the 401(k) Savings and Ownership Plan.

In 2008, the employee submitted a change-of-beneficiary form to her employer, attempting to allocate 33 1/3 percent of her 401(k) benefits to each of her siblings. However, the instructions specified that the allocation percentage must be whole percentages, so the employer did not change her designation. Despite the employer's attempts to notify the employee of the rejection—and sending her 11 subsequent annual statements showing her former spouse as the sole beneficiary—the employee took no further action.

Upon the employee's death in 2019, the employer paid $600,000 in 401(k) benefits to the employee's former spouse. A personal representative of her estate then sued the employer for breach of fiduciary duty, and the former spouse for breach of contract and unjust enrichment. The district court granted summary judgment to both defendants.

On appeal, the 8th Circuit affirmed summary judgment for the employer, finding that while the plan administrator has discretion to create beneficiary designation forms, the plan did not give the administrator discretion to accept designations that fail to comply with the forms. The plan "established a 'uniform administrative scheme' with a 'set of standard procedures' for designating beneficiaries," the appellate court said. "The plan administrator did not abuse its discretion by acting in accordance with plan documents and rejecting the defective change-of-beneficiary form."

Further, the court found the employer had not abused its discretion in distributing plan benefits to the former spouse after learning about the MTA. The employee had not submitted a valid designation, despite the employer having promptly advised her on how to do so. Upon the employee's death, the only valid designation named her former husband as sole beneficiary; the employer "did not abuse its discretion by following the plan's instructions to distribute benefits in accordance with that designation," the court held, affirming judgment for the employer.

Turning to the question of whether a personal representative may sue a recipient of Employee Retirement Income Security Act of 1974 (ERISA) benefits after distribution, the court noted that every other appellate circuit to address the question has held that ERISA does not pre-empt such suits. Agreeing with this authority, the court ruled that the claims in this case were not pre-empted by ERISA.

The appellate court found that if the MTA waived the former husband's beneficiary interest in the employee's 401(k) plan—a material allegation accepted as true for the purpose of standing—the personal representative has third-party beneficiary standing to enforce the waiver, either as the estate's personal representative or as the assignee of the siblings' claims.

The district court had found the MTA ambiguous as to whether it covered the beneficiary designation and thus granted summary judgment for the former spouse. However, the appellate court surmised that "the MTA's words 'all of the parties … interest in and to the 401(k)' certainly seem to encompass (and waive) [the former husband's] beneficiary interest." The court said that, even assuming the MTA is ambiguous, extrinsic evidence created a genuine dispute of material fact as to whether the parties intended the MTA to waive the former husband's beneficiary interest in the 401(k) plan. Although the former husband asserted that the employee had promised to maintain him as a beneficiary as part of a "verbal negotiated agreement" before the MTA was signed, the court noted that the MTA omits any obligation to maintain him as a beneficiary. Further, evidence showed the employee wouldn't have wanted to preserve 401(k) funds for her former spouse as their relationship was not amicable and that the employee tried to remove her former spouse as her beneficiary in 2008.

Stating that a reasonable jury could find the parties intended for the MTA to waive the former spouse's beneficiary interest in the 401(k), the court held that summary judgment should not have been granted on the breach-of-contract claim.

Finally, the court said that if the jury finds the MTA did not waive the former spouse's beneficiary interests, the district court must consider whether equity still requires him to give up the 401(k) benefits. The appeals court reversed summary judgment for the former spouse on the breach-of-contract and unjust enrichment claims and remanded the case for further proceedings.

Gelschus v. Hogen, 8th Cir., No. 21-3453 (Aug. 29, 2022).

Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.