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.
If your client has several beneficiaries, and one predeceases your client, the plan document may provide that the deceased beneficiary’s share is pro-rated and split among the other primary beneficiaries. If your client prefers the deceased beneficiary’s share to go to that beneficiary’s children, your client will need to initiate that change.
Such life events present excellent opportunities for you to help ensure that your clients’ beneficiary designations reflect their current wishes.
Tax time and open enrollment
Income tax time and open enrollment also are natural periods to review beneficiary information. These annual events are convenient reminders for your clients to review beneficiary information on retirement plan accounts as well as on benefits such as group life policies.
Recognizing how important it is to have accurate employee information, many employers routinely remind their employees to double-check their beneficiaries. If your role includes assisting employer groups, you may want to suggest that a beneficiary reminder be added to a quarterly statement or a website login page.
A benefits provider’s customer service representatives could ask callers if they’ve reviewed their beneficiary information within the past year. Employers that have internal human resources telephone lines can rotate in important reminders, such as asking employees to check beneficiary information.
If an employer has even a small budget, a one-page letter may be all that’s needed to remind employees to update their beneficiaries. For one of our clients, we mailed a letter to plan participants informing them they had no beneficiary on file. The letter told them they could designate beneficiaries by completing a form and returning it in a postage-paid envelope; or by going to the program’s website to provide the information. The process required only a few minutes. The low-key approach underscored the ease of the update process. This simple outreach resulted in a nearly 30% response rate.
Under federal law, money in a retirement account without a beneficiary designation automatically goes to the account holder’s spouse unless he or she signs a waiver form. Since retirement accounts may be an individual’s largest single asset, it is especially important to keep these documents updated.
Chris Cumming is a senior vice president at Great-West Retirement Services, Greenwood Village, Colo. You can e-mail him at firstname.lastname@example.org