Beneficiary Designations – Plan Sponsor Best Practices

For most Americans, their retirement plan savings accounts are likely one of their largest and most important assets. And yet many do not give these accounts the attention they deserve when it comes to naming and updating their beneficiary designations for the accounts.

Unfortunately, in almost all cases when problems arise with respect to a beneficiary designation, the participant is no longer around to make sure his or her wishes are carried out. Even worse, a failure to properly designate beneficiaries or to update the designations following a life event, such as divorce or death, usually results in family conflict with the employer as an unwilling player in the family discord.

Unlike other types of property that an individual owns, retirement plan accounts generally do not pass to an individual’s decedents by a will, statute, or rights of survivorship designation. The plan document controls the disposition either through a valid beneficiary designation, or if none, through a plan provision.

There are several things you can do to make sure administration of beneficiary designations runs as smoothly as possible:

  1. Remind employees on a regular basis to make beneficiary designations for ALL applicable accounts and to update them in the event of any life events, such as births, deaths, or divorce. Many recordkeepers offer pop-up reminders when participants login to their accounts, but it may be more important to remind those who might not regularly look at their account online. Just like you might run a savings campaign to encourage employees to make or increase retirement savings, you could likewise hold beneficiary designation “health checks” for employees to review their designations and make changes as needed.
  2. If beneficiary designations are not collected online, consider reviewing them as they are submitted for basic accuracy. Make sure writing is legible, and if there are multiple designations, that the total percentage equals 100 percent. The forms should contain enough information to effectively identify the designee, such as social security number, birth date, relationship, and address. Also, the form should explicitly state that a new designation revokes all prior designations.
  3. Consider your plan language on default distribution provisions upon death. While some plans will choose a list of descending relationships – spouse, children, parents, grandparents, siblings, nieces, and nephews - others might list the spouse followed by the decedent’s estate. While referencing the decedent’s estate might seem like a short cut to the family list, it might also have the unintended effect of forcing such relatives to go to court to open an estate in order to claim the benefit.
  4. Also, consider plan language around divorce. Generally, plan language can be included that will treat a divorced spouse as predeceasing the participant or will invalidate the beneficiary designation naming the ex-spouse as beneficiary. This type of language is much more likely to ensure that a participant doesn’t inadvertently forget about a beneficiary designation in favor of a former spouse.
  5. Remember state law. The Supreme Court ruled in Egelhoff v. Egelhoff that the Employee Retirement Income Security Act (ERISA) preempted a state law that revokes a spouse’s designation as beneficiary on divorce, which ensured that plan sponsors could rely on their own plan documents. Plan sponsors of non-ERISA plans (such as state and local governments and churches), however, should be aware of the impact of such state law provisions on their plans, especially if these laws are in conflict with plan documents.

If you have any questions about your plan’s beneficiary designation language or related forms, please contact any of Bricker Graydon’s Employee Benefits attorneys.


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