The Importance of Current Beneficiary Forms
One of the most important and easily overlooked aspects of retirement plan administration is obtaining, maintaining and collecting updated beneficiary designations from participants. One common misconception is that an employee’s will determines who a retirement plan beneficiary is. However, the reality is that pension plan law and plan documents govern death distributions. Retirement plan documents provide that the Plan Administrator/Plan Sponsor is ultimately responsible for determining who the recipient of death benefits is. It is important to keep this in mind should any discrepancy occur because the beneficiary designation is missing or outdated. These discrepancies are becoming more and more common as participant beneficiary designations are not updated for life changes such as marriage, divorce, remarriage, death of a beneficiary, or birth of a child. Differences between the decedent’s intentions according to their will and the beneficiary designation according to the plan rules could even end up in litigation.
Tips for Plan Administrators:
- It is a best practice to collect and maintain current and compliant beneficiary information with every enrollment form as well as to request updates from employees once a year or, at a minimum, remind them of the importance of updating beneficiary information. When a participant reports a life change, it is a good time to provide a Beneficiary Form as a reminder to update the beneficiary designation, if desired.
- In almost every type of retirement plan, pension law requires that the spouse be the sole primary beneficiary unless he or she consents to a different beneficiary. Typically, for the consent to be considered valid and in order to protect the spouse from unknowingly being removed, the spouse’s consent must be notarized (preferred) or witnessed by an authorized plan representative. It is important to become familiar with the spousal consent requirements on your plan’s beneficiary form so that the form is considered valid.
- If a participant gets married and fails to update his or her beneficiary form, the spousal consent rules automatically supersede the beneficiary designation on file. One common situation that causes unintended consequences is where a divorced participant has a valid beneficiary form naming his /her children as beneficiaries. The participant later remarries and intends that the beneficiary form naming his children as beneficiaries will remain unchanged. However, due to the spousal consent rules, his/her new spouse will automatically get the death benefit unless the new spouse consents on a new beneficiary form dated after the marriage.
- Most plan documents contain a clause that automatically revokes the former spouse as a beneficiary upon divorce. In cases where there is no Qualified Domestic Relations Order, but there is an agreement that provides that all death benefits go to the former spouse, a valid beneficiary form signed after the divorce must be on file designating this.
- If an unmarried participant names a non-relative as beneficiary, the Plan Sponsor has the responsibility of locating the beneficiary. Since people change addresses and names, the Social Security Number may be the only way to verify the identity of a beneficiary. An annual reminder about updating beneficiary information, as suggested above, may save you significant time locating a missing beneficiary in the future. Additionally, collecting beneficiary information such as telephone or cell phone numbers or e-mail addresses may be helpful.
- Many participants name their children as contingent beneficiaries – these are beneficiaries in the event that the primary beneficiary also dies while the account is still open. If a minor child is named as the beneficiary, the participant should seek legal and financial counsel to ensure that this designation is worded appropriately. Typically, minors are not permitted to directly inherit assets from retirement accounts. Steps should be taken to arrange for a trust for the minor child, designate a custodian under the Uniform Gift to Minors Act, or direct that such payment is made to an individual authorized under state law to receive such a payment.
- Some recordkeepers can provide assistance with beneficiary forms, either by accepting completed forms or providing online beneficiary designation services. A word of caution – unless your agreement specifically states otherwise – most recordkeepers are not responsible for ensuring that all forms have been collected, for maintaining or even verifying the accuracy of the designations. Typically, it is still the Plan Sponsor’s role to ensure that beneficiary designations are in place.
Each time you receive an updated beneficiary form, make sure it has been fully completed, signed and dated, and then save it with your plan records. Also keep outdated designations on file, in case the form on file is questioned as the most current.
A good reference tool for information relating to death distributions and beneficiary designations is the Basic Plan Document for your plan. Please do not hesitate to contact your Retirement Plan Consultant with any questions.