How a beneficiary sweep prevented a 401(k) windfall to an ex

The problem

A client we'll call Rob walked in the month after his divorce decree was entered. He had assumed Arizona law would take care of his beneficiary designations. A.R.S. § 14-2804 would revoke his ex-wife as beneficiary automatically.

That is true for some of his accounts. It is not true for his 401(k). Federal ERISA law preempts state revocation statutes for ERISA-governed retirement plans. His 401(k), funded for sixteen years during the marriage, still listed his ex as the primary beneficiary. If he had died that month, the 401(k) plan administrator would have been legally required to pay his ex the entire account balance.

What we did

We ran a complete beneficiary sweep within three days. His 401(k) from his current employer, an IRA rolled over from a prior job, two small 403(b) accounts from consulting work, a $500,000 term life insurance policy through his employer, and two smaller whole life policies. Seven accounts total.

For each one, we pulled the current beneficiary form, drafted the new designation (his two adult children equally as primary, his brother as contingent), and confirmed the change in writing with each plan administrator. ERISA plans require specific notifications. We documented the trail.

We revoked his pre-divorce will and drafted a new will and revocable trust that reflected his current family situation and named his children and one niece as beneficiaries. Powers of attorney naming his brother replaced the ones naming his ex.

The result

If Rob had died during the period between the divorce and our sweep, his 401(k) ($340,000 at the time), his employer life insurance ($500,000), and two other accounts would have gone to his ex. The Arizona revocation statute would not have reached the 401(k) or the employer-sponsored life insurance, both of which are ERISA-governed.

The sweep is now permanent in our practice. Every divorcing client's first post-decree meeting is a beneficiary audit, independent of whatever other documents they need to update. Federal law doesn't care about A.R.S. § 14-2804. The form on file is the one that gets paid.