Why Your Ex Might Still Inherit Your 401(k)

In 2023, more than 1.8 million Americans got divorced. For many Americans, retirement accounts represent their largest assets, and divorce often means dividing those accounts between them and their former spouses. For the portion of a retirement account retained by a plan participant after a divorce, updating the beneficiary designation is an important follow-up step. In cases where the intent is to remove a former spouse as beneficiary of that retained portion, that update must be made in accordance with the plan’s requirements. Otherwise, the attempted change will fail.

A recent case provides an important lesson on how the wrong paperwork can cause a beneficiary change request to fail.

The Facts of the Case Are a Common Postdivorce Scenario

Carl Kleinfeldt participated in his employer’s 401(k) plan for more than 30 years. Like most employer-sponsored plans, it was governed by the Employee Retirement Income Security Act of 1974, which means that the plan document controls how beneficiary changes must be made. He had named his wife, Dená Langdon, as the primary beneficiary of the account.

After their divorce in September 2022, Langdon received a portion of Kleinfeldt’s 401(k) under the divorce settlement. For the remaining balance, she continued to be listed as the primary beneficiary after the divorce. If she had been properly removed, Kleinfeldt’s contingent beneficiaries, his sisters, would have inherited that portion of the account.

Kleinfeldt did not want Langdon to inherit his share of the 401(k). Therefore, shortly after the divorce, he directed that a fax be sent to the plan’s benefits center requesting that his former spouse be removed as beneficiary from his 401(k), pension, life insurance, and other benefits. On its face, that seems reasonable, and many would believe it sufficient. After all, he clearly communicated what he wanted, and he did so in writing.

The Plan’s Rules Controlled the Outcome, Not the Fax

Under the terms of the plan’s governing documents, participants were informed about how to make beneficiary changes, which is to contact the benefits center or update their beneficiaries through the plan’s online system. In other words, the plan had a defined process, and operating outside of that process would not be sufficient. Kleinfeldt did not follow the plan’s requirements.

Based on Kleinfeldt’s instructions, the plan did remove Langdon from certain benefits, such as health coverage. However, for the 401(k), it did not remove her as beneficiary because the fax did not meet their compliance requirements. Instead, her status was changed from “spouse” to “ex-spouse,” and she remained the primary beneficiary on the account. As an ex-spouse beneficiary, she would inherit the account but would not have spousal options, such as rolling the account over to her own.

When Kleinfeldt died in January 2023, the plan followed the beneficiary designation on file and notified Langdon that she was entitled to the remaining balance. At the same time, Kleinfeldt’s estate inquired about the account and ultimately claimed that the fax sent after the divorce had served to remove her as beneficiary. The plan denied that claim, and the matter went to court.

The Court Said Intent Alone Was Not Enough

According to the court, Kleinfeldt’s fax clearly showed that he wanted his former spouse removed as beneficiary. But under Erisa, the analysis does not end with intent. It requires action that meets compliance requirements under the plan.

The question was whether Kleinfeldt had “substantially complied” with the plan’s requirements for changing a beneficiary. Under that standard, Kleinfeldt was required to not only make a clear expression of intent but also take action that closely follows the procedure outlined in the plan.

Kleinfeldt satisfied the first requirement. He did not satisfy the second.

Why the Fax Failed

In previous cases, courts have found substantial compliance when a participant used the correct beneficiary-change form but made a minor error, such as failing to sign or date the document. In those situations, the participant followed the proper process and gave the administrator what it needed, even if the execution was imperfect.

Kleinfeldt’s case was different. He did not attempt to use the plan’s mandatory process, as the plan did not allow beneficiary changes to be made by fax. Therefore, his request did not align with the procedure described in the plan documents, and that distinction proved critical in determining the outcome of his case.

One detail the court noted was that the fax asked the plan to send any forms needed to complete the change. According to the court, this suggested that Kleinfeldt understood additional steps were required. However, he did not follow up to complete those steps. As a result, his actions did not come close enough to the plan’s required process to qualify as substantial compliance for changing his beneficiary designation.

The Result: The Ex-Spouse Inherited the Account

The court determined that Kleinfeldt had not effectively changed his beneficiary designation, which means that Langdon remained the primary beneficiary at his death and was entitled to the account as a nonspouse beneficiary.

From an outside perspective, this result may seem unreasonable, particularly given how clear Kleinfeldt’s intent was. But it reflects a key rule: Plan administrators are required to follow the plan document. They are not expected to interpret intent based on informal communications, and they rely on standardized procedures to determine who should inherit retirement accounts.

Practical Lessons for Retirement Account Owners

A divorce should trigger a comprehensive review of beneficiary designations across all retirement accounts and related benefits, including IRAs, 401(k)s, 403(b)s, pensions, annuities, and life insurance policies. It is not enough to assume that the divorce itself, or related legal documents, will change those designations.

Equally important, any changes must be made using the plan’s required process. A fax, letter, email, or even a provision in a will or divorce agreement may reflect intent, but it may not be sufficient to change the beneficiary if it does not meet the plan’s procedural requirements.

Finally, it is important to confirm that the change has actually been completed. Submitting a request is only part of the process and works only if it meets the plan’s requirements. To be sure, the participant should follow-up to get confirmation that the beneficiary designation has been updated as intended.