Fiduciary Guidance Counsel

That a retirement plan required no spouse's consent for a distribution before the participant's death meant a surviving spouse gets no portion of a $2.7 million benefit.

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Since he filed for divorce I'm guess she wouldn't have given spousal consent but I don't see where spousal consent was in question in this case.

As I understand it participant requested a distribution and a wire was sent on Friday, he died on Sunday, and the funds were credited to his account on Monday.

The spouse was claiming she was beneficiary and entitled to the $2.7M payment but the plan argued he had no accrued benefit as of Friday when the funds left.

The court sided with the Plan.

Could she have Joined the Plan that a (Q)DRO was coming  freezing his account from payment after he filed for divorce but before he took a distribution?

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a bit of a misleading title as she was not a surviving spouse when the distribution was made...  She was simply a spouse with no claim to the assets.

What if it was a $10,000 account balance.  Anyone want to argue that the participant shouldn't be able to take a distribution even though no QDRO had been issued and they were still married?

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RBG is right that on the day of the distribution the spouse was then a spouse rather than a survivor.  And yes, the bigger amount dramatizes the consequences about what the law and the plan provide.

This story caught my attention because a few days ago some of us on BenefitsLink were musing about how ERISA section 205's protection for a spouse might vary according to whether the plan has or lacks annuity provisions.

The Congress that in 1984 set rules to try to get spouses to jointly consider joint needs might not have fully considered how many participants would have a right to a distribution without a provision for one's spouse.

We recognize that the plan administrator's and the Federal courts' decisions are correct.  Rather, I suggest only that the story illustrates some consequences of Congress's legislative trade-offs and public-policy choices in the Retirement Equity Act of 1984.

 

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The key finding here is that the money was in fact out of the trust at the time the participant died.  I wonder where the money was on Saturday and Sunday.  It could easily have been in the general assets of the plan's custodian or directed trustee.  It could just as easily been held in the trust.  The opinion does not dig down to that granular level, and it appears the administrative record may not have either.  Maybe it did.  

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Peter, just curious: are you suggesting/advocating a "solution", whether now or in the future?

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When REA 1984 was passed to provide for spousal protection, defined benefit plans were still very prevalent. Now, with DCPs being the primary source of most people's retirement, it may be appropriate to revisit additional protections. I don't know if QJSA rules for DCPs is the answer, but in this instance - forget about the filed for divorce part - participant could have taken LS and jumped town with his mistress before his wife even knew he and his retirement funds were gone.

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CuseFan:  How is that different than any other marital asset which an unfaithful spouse is in a position to run away with?

I don't know what the thinking was in 1984, but my guess was that the focus was on DB plans that already would have had the annuity structure built in.  What I never could understand is why they extended the requirement to DC pension plans, which, I think, rarely offered an annuity option. 

I don't know what the answer to the public policy question is, but an annuity requirement doesn't seem to be a practical answer as the additional burden on plan administrators is likely to be immense.    

 

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1 hour ago, jpod said:

CuseFan:  How is that different than any other marital asset which an unfaithful spouse is in a position to run away with?

With any other marital asset, the family law judge can give the spouse a remedy.  

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Every one of our DC plans (EVERY ONE) provides the J&S as a normal form.  In 35 years, we have had 2 people actually purchase an annuity (with thousands of lump sum distributions with proper waivers). The bigger problem with DC plans that allow lump sums with no annuity is the requirement that he spouse be the beneficiary for 100% of the account. That means that the plan is being designed to specifically disinherit children of a prior marriage!

When we point that out to new clients where that is an issue, they are often quite angry at their prior plan designer who never discussed that issue with them.  Second marriages for high income business owners seem more often to be the rule today than the exception! Atleast the J^&S option allows for 50% to go to other beneficiaries than the third trophy wife! (politically incorrect statement acknowledged).

Just, FWIW.

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Larry,

Why don't the owners just get a QDRO if they want a portion to go to the children of the prior marriage?  That seems easier than requiring spousal consent for every distribution.

Edited by ERISAAPPLE

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ERISAAPPLE:  The judge can provide a remedy with respect to retirement plan assets too.

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From a plan administration standpoint my reaction to this was "yeah, so?"  It's exactly what I would expect.

From a policy standpoint I guess it is interesting and has obviously generated much discussion.  The differences at this point really do seem random and not justified by any policy goals.

As far as J&S provisions when they are not required, we do not include them and have removed them where possible.  The hassle factor of the waivers at time of distribution is just too much for the very rare instance where you can't accomplish what is needed with a spousal benefit waiver, and even then, you could always add J&S provisions if it was that important. 

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Yes, I don't understand at all the voluntary insertion of J&S as the normal form.  If you want people to have the opportunity to procure an annuity, they can do so via rollovers to an individual retirement annuity. 

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2 hours ago, RatherBeGolfing said:

@ERISAAPPLE

This case did not seek a remedy against the spouse, it sought a remedy against the plan.

 

You may be right.  I do know the Kennedy case in a footnote said the court took no position on whether the spouse can bring a claim against the other spouse.  

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I worked on a case somewhat similar to this years ago. In that case, the participant had dissipated the funds within a matter of 24 hours, so understandably the surviving spouse was looking to the plan and alleging breach of fiduciary duty, etc.

In this case, Wengert, it can be inferred that the family trust to which the ESOP wired the funds gives the surviving spouse a reduced or no benefit. My guess is that the funds in the family trust, once out of the ESOP, would come under the jurisdiction of state law to sort out. Arguably the ERISA result, here, is a good one. A state court may have authority to determine the surviving spouse's rights, if any, to all or a portion of the distribution and will be able to base its decision on a variety of factors (e.g., length of marriage, identities of beneficiaries of family trust) than would the federal court applying ERISA and the terms of the plan document.

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This is from a preliminary ruling in the case and shows the plaintiff's original position.  

The decedent died on September 14, 2014. At the time of the decedent's death, a divorce action between the plaintiff and the decedent was pending in state court. As part of the divorce action, the state court issued an injunction preventing the plaintiff or decedent from transferring or disposing of any property, including the decedent's interest in the Majors Plastics' 401(k).  The plaintiff alleges the decedent transferred $371,449.25 from the Majors Plastics' 401(k) to Rajendran in her capacity as personal representative or trustee on May 29, 2014, in violation of the injunction.  Additionally, the plaintiff alleges two days prior to the decedent's death, on September 12, 2014, the decedent "took steps" to transfer the full value of the ESOP, $2,721,739.37, into an account held by the Trust.  The plaintiff alleges the ESOP Committee improperly transferred the ESOP funds to Rajendran on September 15, 2014, subsequent to the decedent's death.  The plaintiff alleges she was the proper beneficiary of the ESOP as the decedent's surviving spouse and made a demand for payment on the ESOP Committee pursuant to the terms of the ESOP.  The plaintiff alleges her claim was denied and she has exhausted her administrative remedies.

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Just guessing, but for some reason the plaintiff must not have had a good remedy under state law against the family trust. If that were the case, I don't see how the ESOP administrator would have been the appropriate person to help her.

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On 4/4/2018 at 9:43 PM, ERISAAPPLE said:

Larry,

Why don't the owners just get a QDRO if they want a portion to go to the children of the prior marriage?  That seems easier than requiring spousal consent for every distribution.

You've got to be kidding! Allowing for a simple beneficiary designation that allows 50% (instead of 100%) to go to the current wife and the other 50% to go to anyone you want is way simpler than getting a QDRO, not to mention the expense and hassle. 

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On 4/5/2018 at 9:32 AM, jpod said:

Yes, I don't understand at all the voluntary insertion of J&S as the normal form.  If you want people to have the opportunity to procure an annuity, they can do so via rollovers to an individual retirement annuity. 

You miss the point; we would be happy to do away with the J&S requirements IF such an action did not also require that the spouse be the beneficiary for 100% of the death benefit.  THAT is the problem, and we see it as a bigger problem than the J&S waiver.  Having done this for over 30 years (and all the year since REA when this was imposed), I can only say that getting the spousal consent on the waiver has been a non-issue.  Try talking to your multi-married clients and informing them that they have disinherited their children from 50% of their retirement benefit (when they could have avoided that) and see the reaction. It has been (as expected) startling over the years.

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On 4/5/2018 at 9:27 AM, Bird said:

From a plan administration standpoint my reaction to this was "yeah, so?"  It's exactly what I would expect.

From a policy standpoint I guess it is interesting and has obviously generated much discussion.  The differences at this point really do seem random and not justified by any policy goals.

As far as J&S provisions when they are not required, we do not include them and have removed them where possible.  The hassle factor of the waivers at time of distribution is just too much for the very rare instance where you can't accomplish what is needed with a spousal benefit waiver, and even then, you could always add J&S provisions if it was that important. 

Again, it is NOT the J&S provisions that we want (we would prefer they go away); it is the MANDATORY 100% death benefit to the current spouse rather than only 50% that is the problem. See my other response on this issue.

Edited by Larry Starr

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David Rigby, I don't advocate or even suggest any legislative choice.

For me what's interesting is that while all plans governed by ERISA's Part 2 give a spouse at least some control over a plan's death benefit, a vast many plans give a spouse (of an undivorced, unseparated marriage) almost no control regarding a retirement benefit.

Whatever society considers the appropriate degree of control to provide a spouse regarding the participant's retirement plan benefits, it seems perhaps odd to provide more control about the fortuity of death than is provided for a retirement plan's primary benefit.

 

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