Author | Bonnie Treichel
One of the more commonly overlooked aspects of saving in a workplace retirement plan is designating a beneficiary. Most participants aren’t really focused on the possibility of their death at enrollment. Once set in place, it’s not likely to be reconsidered – even if, or more accurately when, circumstances change – as they nearly always do. Plan fiduciaries need to be aware of the legal issues that inconsistent or improper beneficiary designations create, as they not only thwart the intent of the participant, but it can also create challenges for plan fiduciaries caught between the requirements of federal law and state probate laws.
Here’s What You Really Need to Know:
- The law requires that the beneficiary of a married participant must be that individual’s spouse, unless the spouse authorizes the designation of someone else, and does so via a written, notarized consent form.
- The beneficiary designated for the plan will be entitled to that distribution, even if other documents (such as a will) indicate otherwise.
- If someone other than the individual’s spouse is designated, that designation will be deemed invalid unless the individual’s spouse has signed a waiver (typically notarized) and this is allowed by the plan document.
Let’s Dive In…
Many things can change between that initial beneficiary designation – typically when a participant initially enrolls in the plan – and the participant’s death when a beneficiary designation matters the most.
The Employee Retirement Income Security Act (ERISA) requires that plans be administered in accordance with the law and the plan document, which includes honoring the valid beneficiary designation on file for each participant. Moreover, under ERISA section 404(a), fiduciaries are obligated to act prudently and in the best interest of participants and beneficiaries. Failing to maintain up-to-date beneficiary records or to follow proper documentation procedures can result in a breach of fiduciary dutyi.
Sadly, courts are littered with cases involving deceased participants where the plan distributed assets to an ex-spouse or defaulted to the estate because no beneficiary was on file. The fallout can be embarrassing and devastating to families, costly to plan fiduciaries, and contradictory to the actual desires of the participant.
Sample Scenarios and Outcomes
As plan sponsors consider their fiduciary responsibilities related to maintaining beneficiary designations, some common scenarios to consider include:
- Outdated Designation: John named his wife as the beneficiary of his 401(k) in 2005. They divorced in 2015, and he never updated the form. When John died in 2023, his ex-wife received the account, despite John’s verbal instructions to leave it to his children.
- No Designation: Marie enrolled in her 401(k) in 2001 but never completed the beneficiary form. She passed away unexpectedly in 2022. Without a beneficiary, the plan defaults to its governing plan document, often meaning the assets pass to her estate. This can trigger probate, delay distribution, and lead to unintended recipients.
- Conflict with Will: Greg names his sister on his 403(b) beneficiary form but later writes a will leaving everything to his daughter. Beneficiary designations on retirement accounts override the will. The sister receives the 403(b) account, regardless of Greg’s intent in the will, causing family conflict and possible legal challenges.
- No Contingent Beneficiary: Lisa names her husband as the sole beneficiary but doesn’t name a contingent beneficiary. Lisa and her husband die in a car accident together. Without a contingent beneficiary, the account reverted to the estate which was not in line with her wishes.
- Conflicting Designations Made by Participant: Erin designated a beneficiary on a paper form from the plan sponsor and then added a different beneficiary a few months later when she received a notice from the recordkeeper to “update her beneficiary” because she forgot about the paper form she completed. When Erin died, there were conflicting beneficiaries on file. The plan sponsor had to pay to litigate a claim between the two conflicting beneficiaries.
Beneficiary designations may seem like a personal matter, but errors or oversights can create headaches for your human resources or benefits team and potential liability for the plan. Proactive education, documentation, and regular check-ins are the best defense and the surest way to ensure that the distribution(s) are in accordance with the wishes of the participant.
Considerations for Plan Sponsors
Plan sponsors should consider these participant communications and other action items.
- Conduct an Annual Beneficiary “Check-Up” Education Campaign. Encourage employees to review their designations during open enrollment or when updating other benefits.
- Ensure That the Rules – and Implications – Regarding Spousal Consent Are Communicated. If a non-spouse is named, be sure that you have notarized spousal consent.
- Highlight the Life Events That Trigger Change. Marriage, divorce, birth, death —these are critical inflection points. Include reminders in onboarding, offboarding, and leave-of-absence communications.
- Remind Employees That a 401(k) is Not the Same as Life Insurance. Employees often believe that updating one benefit, updates all. It doesn’t. Create a cross-benefits checklist to help employees align their elections.
- Document Communication Efforts. Fiduciaries don’t have to chase down every participant, but fiduciaries do need to demonstrate prudent oversight. Keeping a record of outreach helps.
i In its “Missing Participants” guidance from 2021, under Field Assistance Bulletin 2021-01, the Department of Labor specifically calls out the importance of maintaining “complete and accurate census information, including contact information and beneficiary designations. While the broader focus is on locating participants, the underlying principle applies: you can’t fulfill your fiduciary duties without good data—and that includes up-to-date beneficiary designations.
