Employer Admits 401(k) Beneficiary “error” Where He Was Listed Instead Of The Intended Beneficiary (my Mil)

Location: Honolulu, Hawaii.

A family friend died a year ago. He was homeless for 20+ years (he struggled with substance abuse issues, but never missed a day of work) and had the majority of his paychecks deposited into a 401(k) (as arranged by the employer and employee). Three months before his death, he told us that he had just over 1 million in the account and was being required to name a beneficiary. He said he wanted my mother-in-law to be the beneficiary. They were childhood friends and neighbors until he sold his family home at the peak of his drug addiction to the man he worked for, and the circumstances there also seem shady. He slept on the streets near his place of work during the week, but stayed at my MIL's home on the weekends. She and her siblings looked after him as much as they could. He asked for my MIL’s SSN so that his employer/401(k) provider could add her as the beneficiary.

After his death (he was found drowned at the pier near his place of work, but I think investigations didn't find any foul play), my MIL went to speak with his employer. The employer told my MIL the account was around $300k (tapping and pushing a white envelope that she did not touch or know why it was there since he wasn't expecting her), even though the deceased had said it was much more than that. She then learned the employer was listed as the beneficiary. The employer has admitted this was an administrative error and that he was named instead of my MIL. He said it might go into probate and that he will take care of the taxes. It has now been a year, and he has been saying that he has not received anything because he was having difficulty obtaining a death certificate, but that he will write her a check since he knows that the deceased wanted her to have it.

My MIL is inclined to just accept the check. She is worried she can’t prove intent (most of these conversations were verbal) and has a lot of fears about getting into a legal battle. The employer has a reputation for not being a stand-up individual and is wealthy, so she thinks it might be a losing battle. If he is willing to give her even a portion of it, she thinks that is the best-case scenario. What are her options? This seems extremely illegal to me.