Retirement Plan Beneficiary Information Needs Regular Checkups

A recent U.S. Supreme Court case demonstrates the importance of ensuring that beneficiary designations are current on 401(k) accounts and other company-sponsored retirement plans.

In the case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, a couple had divorced in 1994. The man, who participated in a 401(k) plan, died in 2001. He had never changed his beneficiary designation in the plan documents after the divorce, so the court affirmed his ex-wife’s rights to his retirement plan benefits–though she had waived all claims to the benefits in the divorce decree. The entire 401(k) account balance went to his ex-wife. His daughter, who had petitioned for the benefits, saying her father wanted her to have the money, didn’t receive a cent.

The importance of double-checking

As an advisor, you should remind clients to double-check beneficiary information. If your role includes advising individuals or employer groups, you need to routinely remind customers to review and update their beneficiary designations.

While this appears to be a simple and logical step, reviews of retirement plan accounts indicate many individuals don’t keep their designations current. For example, Great-West Retirement Services reviewed the accounts of more than 2.5 million retirement plan participants for whom we store beneficiary designations on our record keeping system. We found that only 6% of account holders made any beneficiary change in 2008.

Also remind your clients to be specific and include full names when they complete a beneficiary designation form. For example, if your client has stepchildren or children from a previous marriage, he or she should not write all my children. This phrase may raise the question, which children? While your clients know what they mean, it becomes a different issue with the trustee or administrator handling the distribution.

Take advantage of life events

Life events present an opportunity to review beneficiary information. There are certain times in your clients’ lives when it makes sense to revisit their important documents. For example, marriage, divorce and remarriage all present opportunities to review and update key materials, including beneficiary designations.

The birth or adoption of a child presents another opportunity, as does the time when adult children become financially independent and move away from home. As your clients approach retirement, it’s another ideal time to revisit key documents.

Finally, if your client’s beneficiary predeceases your client, take a moment to confirm with your client that he or she is comfortable having the contingent beneficiary become the primary beneficiary.