The fiduciary duties of retirement plan sponsors apply to both the interests of participants and beneficiaries. Accordingly, it is essential for plan sponsors to make sure the processes for designating, reviewing and updating beneficiaries are effective, as well as clearly and frequently communicated to plan participants.
Clear and Frequent Communication
Retirement plan communication experts remind us: “The importance of accurately designating and regularly updating beneficiaries cannot be overstated. As retirement savings often represent one of the largest assets for many Americans, ensuring these designations are current and clear is crucial to preventing potential legal disputes and family conflicts after a participant’s death.” Although it is plan participants who must make beneficiary designations, and keep them up to date with life events (i.e. births, marriages, divorces…), plan sponsors have a “pivotal role” in ensuring participants receive ample communication about beneficiary designations, following these best practices:
- Regular Reminders: Encourage participants to review and update their beneficiary designations regularly, particularly following major life events such as marriage, the birth of a child, or a divorce. These reminders can be integrated into annual review processes or triggered by changes in employee marital status….
- Accuracy and Completeness: Ensure that all beneficiary designations are complete and legible. It’s vital to verify that the total percentages designated by participants equal 100 percent and that each beneficiary is clearly identified to avoid any ambiguity.
- Plan Language on Default Provisions: …Clearly communicate the plan’s default provisions for distributing assets if no valid beneficiary designation exists. Common defaults may include distributing assets to a descending order of relatives or to the participant’s estate….
- Handling Divorce: Clearly outline how divorce impacts beneficiary designations. Some plans may automatically treat a divorced spouse as predeceased, removing them from beneficiary designations unless the participant reselects them.
By providing frequent communications to plan participants about beneficiary designations, and ensuring efficient protocols for making changes, plan sponsors play an important role in helping participants fulfill their ultimate intentions for distributing assets. Good housekeeping related to beneficiaries also goes a long way toward the reduction of disputes and litigation.
An Ounce of Prevention
Of course participants and beneficiaries “missing” from the plan is also counter productive to successful retirements–and in fact, a big fiduciary problem in the eyes of the DOL. Plan sponsors retain fiduciary responsibility for communicating with missing participants,“so it is important to take steps to keep in touch with employees even if they leave or retire by collecting personal contact information while they are still employed….” Accounting experts at Mauldin & Jenkins point out “the best practice of all is to establish strong administrative procedures that minimize the likelihood of missing participants,” and recommend these tactics:
- Proactively maintaining an accurate plan census,
- Periodically prompting participants and beneficiaries to reconfirm their contact info, and
- Regularly auditing census data, paying special attention to contact info in business transactions or when recordkeepers change.
The DOL’s guidance on missing participants, issued in 2021, provides further instruction for plan sponsors to follow. While acting with diligence to fulfill all of their obligations under the high standards of ERISA law, it is crucial for plan sponsors to also protect themselves. Unforeseen challenges arise all the time, and seemingly small oversights are known to trigger costly investigations and lawsuits. In fact, the average ERISA claim costs businesses over $1.2 million in legal fees–whether or not the sponsor did anything wrong.
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