It’s Not Your Job, But Somebody Has To Do It

7 Tips To Help Retirement Plan Participants Complete & Regularly Update Their Beneficiary Designations

It’s pretty common for employees to forget to update the beneficiary designations on their retirement plans – especially younger plan participants who tend to pay less attention to these designations because, after all, they have all the time in the world to take care of it. But even though you know that this is happening, you are probably wondering if it’s your job (as the plan sponsor) to remind them to update their paperwork. After all, you’re supposed to be their employer … not their helicopter parent.

While it is certainly not the responsibility of the employer to check and double-check the accuracy of an employee’s beneficiary designations, there are some pretty good reasons why plan sponsors should reconsider their role in the process.

Who’s Job Is It To Collect & Retain Completed Beneficiary Forms?

Even though some employers believe that it’s the responsibility of the plan’s record keeper (or third-party administrator) to collect and retain completed beneficiary forms, more often than not, this responsibility actually falls on the plan administrator (also known as the employer). Sure, your TPA is likely saving the beneficiary forms they receive; but it’s actually up to the employer to keep completed beneficiary forms on file for every employee who is eligible to participate in the plan – even if they are not deferring.

Under Section 107 of the Employee Retirement Income Security Act of 1974, the party responsible for filing plan reports must “maintain records to provide sufficient detail to verify, explain, clarify and check for accuracy and completeness.” Additionally, under Section 209, employers must maintain employee records “sufficient to determine the benefits due or which may become due to such employees.”

Why Ensure Forms Are Updated?

While plan administrators are persistent about having their employees enroll in the plan, they don’t always require the beneficiary designation form to be completed.

The law requires most plans, including 401(k) plans, to have a spouse listed as at least a partial beneficiary of a participants plan unless that person signs off on naming a different beneficiary. As a result, many married employees will choose not to complete a beneficiary designation because they don’t think it is necessary. The issue, however, is that situations change over time. Single participants get married, married participants get divorced (and maybe remarry) and so on … While life is happening, participants often neglect to update their beneficiary designations to keep up with the changes.

So, for example, if a participant divorces and remarries but wants the children from the first marriage to be beneficiaries, if the participant doesn’t update their beneficiary designation form, their new spouse might inherit the rights to the retirement plan benefits. That is unless a qualified domestic relations order (QDRO) assigned the benefits to members of the earlier family or they consent to another beneficiary … after the marriage. What often results in this type of situation is that the dispute ends up in litigation, and it actually happens more than you than you might imagine.

The following seven tips will help ensure that your employee’s beneficiary information is complete, current and secure.

1. Securely retain copies of beneficiary designations. You don’t want someone’s wishes to be undone due to poor recordkeeping at the plan level. This is important information and should be treated as such. Whether you keep paper copies or electronic files – make sure they are organized and safe.
2. Know who is responsible for keeping the designation forms. The primary responsibility lies with the plan administrator. However, record keepers and TPAs have been known to take on the responsibility of retaining forms. It is important to have the responsible party listed in a provider’s service agreement and to communicate this information to your employees.
3. Pass out new beneficiary designation forms during the annual open enrollment process. This will remind and encourage participants to complete or update their forms. And don’t forget to take this opportunity to remind them that their forms should also be updated when their personal circumstances change.
4. Let employers know when beneficiary designations are active. To avoid confusion down the road, be sure to let eligible participants know that beneficiary designations (new or updated) are only effective when the plan administrator or a delegate receives them.
5. Determine if participant account statements should be updated to include the current beneficiary. At the very least, the end-of-year statement should include current beneficiary information. You can also provide each participant a separate notification once per year.
6. Pay attention. If you know that participant is getting married, divorced or having kids – take the opportunity to give them a beneficiary designation form and explain why it should be updated.
7. Find out if your plan provides automatic revocation of beneficiary designations in favor of a spouse when the parties divorce and communicate your findings to participants in the summary plan description. If a divorce order states that death benefits go to the spouse, an automatic revocation provision can disinherit the former spouse against all intentions. And, without a QDRO, neither the participant nor the former spouse might know that.

Give me a call at 614.923.6573 to discuss the importance of keeping your retirement plan records current. Or, you can contact Rea & Associates to speak with another member of our retirement plan services team on any number of topics.

By Andrea McLane, CPA, QKA (Dublin office)