Failure to update beneficiaries of retirement accounts hands inheritances to the wrong people

A retirement account can bypass nearly every document in an estate plan with a single outdated form. Millions of Americans assume their wills or trusts control who inherits their 401(k) or IRA balances, but beneficiary designations operate under separate legal rules that often override those instructions entirely.

That means a former spouse, omitted child, or unintended heir can legally receive retirement savings simply because an old designation was never updated. As retirement balances continue climbing and more wealth shifts between generations, these mistakes are becoming increasingly costly for families already dealing with grief and legal confusion.

Even people with carefully prepared estate plans can face unexpected inheritance disputes when beneficiary forms on old workplace plans or IRAs no longer match their current intentions.

Beneficiary designation forms override wills on 401(k) and IRA accounts

Beneficiary designations operate under contract law, which means the financial institution holding your retirement account is legally required to distribute the funds to the person listed on the form, according to USA Today.

Federal law governing employer-sponsored plans, known as ERISA, reinforces this principle and prevents state divorce statutes from automatically revoking a former spouse's claim to a 401(k) or pension, according to the U.S. Department of Labor.

"The classic worst case is you get divorced, your ex-wife is named as beneficiary, and you never change the form. You might have changed your will to leave everything to the kids. But after you die, your individual retirement account, if it's never changed, will go to your ex-wife, not the kids," Ed Slott, certified public accountant and founder of Ed Slott and Company, told CNBC.

The U.S. Supreme Court cemented this standard in Egelhoff v. Egelhoff (2001), ruling that a Washington state statute automatically revoking ex-spouse beneficiary designations after divorce was preempted by ERISA. This left the deceased's ex-wife as the legal beneficiary of his retirement plan, despite his children's competing claims.

Why millions of retirement accounts carry outdated or missing beneficiary names

The share of Americans with any formal estate planning documents has been declining steadily over the past several years. Only 24% of American adults reported having a will in 2025, down from 33% in 2022, according to Caring.com's 2025 Wills and Estate Planning Study.

Among those without a will, 43% told researchers they simply had not gotten around to creating one, which suggests that beneficiary designations on their financial accounts are equally neglected. The dollar amounts at stake have reached historic levels, making each neglected form potentially more costly than ever.

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The average defined-contribution plan balance reached a record $167,970 across all age groups in 2025, according to Vanguard's Previewing How America Saves 2026 report. Workers aged 55 to 64 held an average of $271,320 as of year-end 2024, according to Vanguard's How America Saves 2025 report.

A single outdated beneficiary form on an account of that size could divert a substantial portion of a family's generational wealth to an unintended recipient, according to USA Today.

A major reason these forms remain outdated is that retirement accounts often follow workers across multiple jobs over decades, while the paperwork tied to them receives little attention after the account is opened.

Employees frequently roll over balances, leave dormant 401(k) plans at former employers, or consolidate accounts without revisiting the beneficiary sections of each plan.

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Beneficiary designation errors that send retirement money to wrong heirs

Estate planning attorneys and plan administrators report a consistent set of mistakes that surface in probate disputes after a retirement account holder dies, each one rooted in a gap between what the person intended and what the beneficiary form instructs.

Common retirement account beneficiary errors

• Leaving an ex-spouse as the named beneficiary after a divorce: ERISA-governed plans are not affected by state divorce laws, and the Supreme Court's Egelhoff ruling confirmed that the last named beneficiary prevails, regardless of a change in marital status.
• Failing to name any beneficiary at all: When no individual is designated, the account defaults to the estate, which triggers probate proceedings and can force a full distribution within five years, accelerating the entire tax bill on the inherited funds.
• Skipping the contingent beneficiary line: If the primary beneficiary predeceases the account holder and no backup beneficiary is listed, the account defaults to the estate, creating the same probate and tax acceleration problems.
• Naming a minor child directly: Minors cannot legally manage inherited retirement assets, which forces a court-appointed guardian to control the funds until the child reaches the age of majority, creating delays and legal costs.
• Forgetting about old employer 401(k) plans: Retirement accounts from former employers held years or decades ago often carry designations that no longer reflect the holder's current family structure, Carnegie Investment Counsel warned.

SECURE Act rules make retirement beneficiary mistakes even more expensive

The financial consequences of these errors intensified after the SECURE Act of 2019 replaced the old stretch IRA provision with a 10-year distribution window for most non-spouse beneficiaries, compressing taxable income into a much shorter period and potentially pushing heirs into higher tax brackets for the entire decade.

"Congress enacted some little-noticed changes to longstanding tax laws that make certain retirement savings accounts much less appealing to inherit than they once were," said Richard L. Kaplan, the Guy Raymond Jones chair in law at the University of Illinois Urbana-Champaign, in a published research analysis.

Kaplan noted that non-spouse beneficiaries must now withdraw all inherited retirement funds over no more than 10 years, regardless of when the accounts were first established.

Estate planners urge annual reviews of retirement account beneficiaries

Retirement beneficiary mistakes rarely come from complicated legal loopholes. More often, they stem from forms that were forgotten after divorces, remarriages, births, job changes, or deaths within a family.

Because retirement accounts transfer according to contractual beneficiary instructions rather than wills, even a well-organized estate plan can fail to direct assets to their original intended beneficiaries.

The stakes have grown larger as account balances rise and newer inheritance rules accelerate withdrawals for many non-spouse heirs. Estate attorneys continue to see the same preventable disputes appear after someone dies, particularly involving old employer-sponsored plans and missing contingent beneficiaries.

For many families, the problem only becomes visible after the account owner is gone and the money has already been legally assigned elsewhere.

Related: The inheritance mistake that can tear families apart

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This story was originally published May 13, 2026 at 7:33 PM.