R.i.p.: the Federal Common Law Waiver Approach to Retirement Plan Death Benefits Finally Rests in Peace After Kennedy v. Plan Administrator for Dupont Savings & Investment Plan, 497 F.3d 426 (5th Cir. 2007), Aff'd, 129 S. Ct. 865 (2009)

• Publication year: 2021

88 Nebraska L. Rev. 204. R.I.P.: The Federal Common Law Waiver Approach to Retirement Plan Death Benefits Finally Rests in Peace After Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 497 F.3d 426 (5th Cir. 2007), aff'd, 129 S. Ct. 865 (2009)

R.I.P.: The Federal Common Law Waiver Approach to Retirement Plan Death Benefits Finally Rests in Peace After Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 497 F.3d 426 (5th Cir. 2007), aff'd, 129 S. Ct. 865 (2009)

Patricia L. Vannoy

Note(fn*)

TABLE OF CONTENTS

I. Introduction.......................................... 205

II. Background........................................... 207
A. The Intent and Purpose of ERISA................. 207
B. The Statutory Approach........................... 211
C. The Federal Common Law Waiver Approach....... 213

III. Analysis.............................................. 215
A. The Fifth Circuit Opinion in Kennedy.............. 215
B. What the Fifth Circuit Did Right.................. 218
1. The Black Letter Law of ERISA................ 218
2. The Public Policies and Legislative Intent Underlying ERISA............................. 222
3. The General Equities Involved in Retirement Plan Death Benefits........................... 226
C. What the Fifth Circuit Did Wrong................. 227
D. The Supreme Court Opinion in Kennedy........... 229
E. A Lingering Question.............................. 232

IV. Conclusion............................................ 234

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I. INTRODUCTION

Cinderella thought she'd found her Prince Charming-until the "happily ever after" failed to materialize. They harbored no ill will against each other, just realized over the years that a marriage should be built on more than a shoe size. So, they signed away their rights to each other's property, put the divorce decree in a safe deposit box, and moved on with their lives. Although they remained friends, when the tabloids broke the news of Charming's death in a tragic motorcycle accident a few years later, Cinderella was surprised to learn she was the named beneficiary for his retirement plan with Royalty, Inc. But Charming's evil stepbrother was quite disgruntled about his former sister-in-law getting the $1 million nest egg he thought should stay in the family. He sued the retirement plan, alleging that Cinderella waived her rights to Charming's retirement in their divorce decree, dragging them both into years of bitter litigation.

Cinderella's story is hardly a fairy tale; it is an increasingly common predicament faced by families and courts across the country. Hovering at the intersection of state family law and the Employee Retirement Income Security Act of 1974 (ERISA),(fn1) the issue of whether a retirement plan(fn2) beneficiary may waive his or her interest through an ordinary "non-qualified" divorce decree has created a definitive split among the federal circuit courts of appeal and state supreme courts.

On one side, courts that follow the statutory approach contend that ERISA itself addresses the issue.(fn3) One ERISA provision provides that retirement plan benefits cannot be "assigned or alienated," and this includes waiver.(fn4) Another provision provides that retirement plan administrators must distribute benefits according to the documents and

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instruments governing the plan.(fn5) A third provision makes clear that state law (including family law) is preempted by ERISA.(fn6) There are three explicit exceptions to these rules, including an exception for divorce decrees that are "qualified" under specific statutory criteria.(fn7) According to the statutory approach, the beneficiary designation on file with the retirement plan controls who will receive the benefits of a deceased participant, unless the requirements of one of the statute's explicit exceptions are fulfilled.

On the other side, the "federal common law waiver" approach is based on the premise that ERISA does not provide the answer.(fn8) The "anti-alienation provision" does not apply because a "waiver" by a beneficiary is not an "assignment or alienation."(fn9) The "fiduciary duty provision" does not apply because it does not explain how plan administrators should determine who is entitled to benefits.(fn10) And the "preemption" provision is irrelevant because it does not preempt federal law that is uniform and consistent across every state.(fn11) Thus, because ERISA does not answer the issue presented, courts following this approach attempt to develop a federal common law standard for when a waiver is effected through a non-qualified divorce decree.

In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, (fn12) the Fifth Circuit correctly adopted the statutory approach but overreached in its reasoning, thereby raising two potential problems. This Note explains the Fifth Circuit's opinion and how the Supreme Court has refined the Fifth Circuit's analysis to eliminate the pitfalls. It then concludes by describing an unresolved issue in the equitable treatment of retirement plan death benefits.

Part II gives an overview of the history of ERISA and the congressional policy objectives behind it. This section then describes the split among the circuit courts of appeal and state supreme courts, and examines ERISA's preemption of state law, the only point snared by both approaches. Part III begins by analyzing what the Fifth Circuit

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did right in terms of the black letter law of ERISA, the policies underlying ERISA, and the general equities surrounding retirement plan death benefits. This section then highlights two problems with the Fifth Circuit's approach, explains how the Supreme Court resolved these problems, and describes an issue raised, but not resolved, by the Supreme Court's opinion. Part IV concludes that the result in Kennedy, as defined by the Fifth Circuit and refined by the Supreme Court, is the correct and common-sense approach to retirement plan death benefits.

II. BACKGROUND

A. The Intent and Purpose of ERISA

ERISA is "an intricate, comprehensive statute"(fn13) regulating a wide variety of fringe benefits offered by private employers to their employees. As a reaction to historical abuses, the statute was designed to protect employee interests in these benefits.(fn14) This principal objective is declared in the statute itself, which states it "protect [s] . . . the interests of participants in employee benefit plans and their beneficiaries"(fn15) by "improving the equitable character and the soundness of such [private retirement] plans."(fn16)

Another principal goal of ERISA is to ease plan administration for employers by affording them a consistent procedure for processing claims and disbursing benefits, free from varying obligations under state laws.(fn17) This encourages employers to offer benefits(fn18) by minimizing their administrative and financial burdens-burdens they

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would ultimately pass on to the beneficiaries in the form of higher costs.(fn19)

ERISA's specific provisions are intended to implement these general policies.(fn20) For instance, the "plan documents rule" requires that every plan "shall be established and maintained pursuant to a written instrument"(fn21) that must, among other things, "specify the basis on which payments are made to and from the plan."(fn22) Many of ERISA's other provisions rest on this core principle, whereby the plan documents determine the scope and operation of each plan, generally facilitating certainty, which in turn allows for efficient and inexpensive administration. Most important for the issue presented, ERISA relies on the plan documents rule to impose a fiduciary duty on plan administrators to discharge their duties "in accordance with the documents and instruments governing the plan."(fn23) Once benefits are thus defined and protected from the whims of the plan administrator, ERISA protects those benefits from third parties and the participant's own whims by prohibiting nearly any "assignment" or "alienation" of plan benefits.(fn24)

But bright-line rules inevitably cause inequity in some cases. For this reason, the Retirement Equity Act of 1984 (REA) was enacted to afford greater protection for participants' spouses,(fn25) and to put to rest "any concern for the ability of individuals to freely and voluntarily relinquish certain rights in their former spouses' ERISA plan benefits upon divorce."(fn26) The REA amended ERISA in two ways. First, it required every defined benefit plan(fn27) to provide an annuity to any surviving spouse after a participant's death.(fn28) This spousal interest cannot be waived or reassigned without the spouse's written consent.(fn29)

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Second, and most important for the issue presented, REA created the concept of qualified domestic relations orders (QDROs).(fn30) A QDRO allows a state court to sidestep ERISA's anti-alienation and preemption provisions(fn31) and use retirement plan funds in awarding alimony or child support or when dividing marital property.(fn32) To qualify as a QDRO, a domestic relations order issued under state law must meet certain requirements.(fn33) Most notably, a QDRO must clearly specify how payments are to be made from the retirement plan and to whom.(fn34) Retirement plan administrators must develop procedures for determining whether domestic relations orders they receive are QDROs and must notify the affected parties of their...