For most savers, the 401k plan represents their largest asset toward ensuring both a secure older age, and the possibility of leaving loved ones with “at least a little something” for their well-being. Needless to say, effective communication with plan participants about their beneficiary designations is vital.
Making and Updating Designations
Retirement plan participants are responsible for making beneficiary designations, and keeping them up to date as families change (i.e. births, marriages, divorces…). To assist participants, it’s key for plan sponsors to make sure plenty of clear and regular reminders related to beneficiary designations are shared. In addition to prompting plan participants to update beneficiary designations following family events like marriage or birth, it’s imperative for plan sponsors to ensure third party providers are reviewing:
- 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….
Unfortunately, mistakes and oversights related to beneficiary designations on retirement accounts can prove devastating for families, and even muck up otherwise carefully made estate plans, as Ariana Flynn at Absolute Trust Counsel points out:
You have heard the common estate planner saying, “make sure your beneficiary designation forms are filled out!” Yet, one of the most critical and often overlooked aspects of the estate planning process is properly filling out a beneficiary designation form after creating an estate plan. Beneficiary designation forms are filled out for retirement accounts like 401(k)s, IRAs, and even pensions that have an at-death beneficiary transfer. The beneficiary designation form is a crucial document, as it indicates who will receive that particular asset once an individual passes away. The beneficiary designation form will override what is written in the individual’s trust or will for this particular asset, and if one is not completed, the individual risks their estate going through probate to be able to access and distribute the funds in that particular account. This is why it is essential to properly fill out the beneficiary designation form.
Given the confusion that many retirement plan participants are likely to have with the associated terminology, it’s helpful to break down some of the common approaches for designating beneficiaries. For example, Flynn shares several examples of how beneficiary designations can be made on a retirement account, including these:
Name an Individual
The most common way to fill out a beneficiary designation form is to name a single person, such as a spouse, as the primary beneficiary. In certain circumstances, it would make sense for an individual to also name a “backup” beneficiary, called a contingent beneficiary, who will receive the funds if the primary beneficiary has also passed away. This could be listed as follows:
- Primary Beneficiary – Spouse (100%)
- Contingent Beneficiary – Child (100%)
Divide Among Multiple Individuals
Another common way individuals fill out their beneficiary designation form is to name multiple people as their primary (and contingent) beneficiaries. This approach is useful if an individual wants to provide for more than one person. The beneficiary designation form will designate a certain percentage to each beneficiary. For example:
- Primary Beneficiary – child #1 (50%) and child #2 (50%)
Good To Know–and Do….
By frequently communicating with plan participants about beneficiary designations, and providing efficient protocols for making updates, plan sponsors play an important role in helping participants fulfill their ultimate intentions for carefully saved assets. Remember too: 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 further urge:
- 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.
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