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Plan Sponsor Best Practices: Maintaining Beneficiary Designations

September and October means the beginning of fall and football season.  For many employers and their employees, September and October marks the beginning of the annual open enrollment season for employee benefit plans.  Human resources becomes inundated with paperwork, questions, and last-minute requests for changes.  While the focus is predominantly on health and cafeteria plans, open enrollment may be a good time to encourage employees to review and update retirement plan beneficiary designations.

Most plan sponsors seem to have a pretty good understanding of their fiduciary obligation for overseeing investment elections, timely remittance of employee deferrals, and delivering required participant notices.  However, another fiduciary duty is the proper maintenance employee records which includes beneficiary designations. Unfortunately most plan sponsors don’t become aware of issues with maintaining beneficiary designations until the need arises to make a determination of beneficiary status.

Section 1104(a)(1)(D) of ERISA states that fiduciaries will discharge their duties in accordance with the documents and instruments governing the plan.  Maintaining accurate beneficiary designations is a challenge due to lack of attention by employees , the constant changes in employees’ lives, and the fact that the lifespan of beneficiary designations is often much longer then an employees’ tenure.  This process can be made even more difficult for larger employers utilizing an HRIS as the central warehouse for beneficiary designations for all employee benefit plans.

ERISA’s intersection with state statutes for community property requires special attention when it comes to qualified retirement plan beneficiary designations.  Courts have shown time and again that ERISA preempts state statutes.  A 2012 DOL Advisory Council on Employee Welfare and Pension Benefit Plans even discussed whether ERISA preempted state “slayer statutes” which prevents a beneficiary convicted of murdering an account owner from receiving benefits.  Divorce decrees and state statutes that may automatically nullify an ex-spouse’s right to benefits under employee benefit plans do not supersede the current beneficiary designations on file for an ERISA-covered qualified retirement plan.

Outdated or incomplete beneficiary forms would appear on the surface to be a problem for the participant (or more specifically, the deceased participant’s beneficiaries).  However issues with beneficiary forms can quickly become the plan sponsor’s problems when the plan sponsor is asked to make beneficiary determinations. Plan sponsors can quickly find themselves in the middle of a court proceeding challenging incomplete or improper beneficiary designations.  Even more troubling to plan sponsors should be the fact that in some instances the plan sponsor has been forced to make a second beneficiary payment when a court has determined the initial beneficiary payout was not done correctly.

So what can plan sponsors due to protect themselves:

  • Understand your plan documents rules for determining beneficiaries and making payments. All plan documents should have procedures for how to determine beneficiaries and the order of default beneficiary designations.  The increasing popularity of auto enrollment has increased the number of participants with no beneficiary designation on file.  It is more important than ever for plan sponsors to carefully consider the default beneficiary designations and the order of beneficiary designations.
  • Review beneficiary designations for new enrollees. Ensure that their forms are completed and their marital status has been properly designated.  At the end of the day plan sponsors probably should not require completed beneficiary forms as a condition for participating in the plan.  However a quick email or phone call to a new enrollee to clarify a beneficiary form could save the plan sponsor a tremendous amount of time and money down the road.
  • Re-solicitation of beneficiary designations for existing participants. The 2012 DOL report on the Current Challenges and Best Practices Concerning Beneficiary Designations for Retirement and Life Insurance Plans suggested that periodic re-solicitation of beneficiary designations can be effective in maintaining accurate records.  More importantly, it could be helpful in a dispute over a beneficiary claim by showing that the plan sponsor was proactive in maintaining complete and accurate beneficiary designations.  The report also suggested that re-solicitation efforts can be more effective when the communication to participants includes the current beneficiary designations on file.
  • Maintain beneficiary records. This may seem obvious, but plan sponsor should maintain beneficiary records for as long as a participant has an account under the plan.  Plan sponsors may want to consider maintaining beneficiary records for several years after a participant has requested a distribution.
  • Check service agreements. For plan sponsors using a third-party 3(16) fiduciary, check your service agreements to determine whether the 3(16) fiduciary has accepted responsibility for maintaining beneficiary records and determining beneficiaries.  For plan sponsors who may not be utilizing a third-party 3(16) fiduciary, it’s still a good idea to review service agreements to determine:
    1. Can your service provider solicit and maintain beneficiary designations?
    2. What recourse does the plan sponsor have to a vendor that has failed to properly maintain beneficiary designations?
  • Re-solicit beneficiary updates on a change in status. Plan sponsors may want to consider establishing procedures for soliciting retirement plan beneficiary updates when an employee requests a change in the health plan due to a change in status.
  • Follow proper procedures for locating missing beneficiaries. Revenue Procedure 2012 – 35 (please make this a link to https://www.irs.gov/pub/irs-drop/rp-12-35.pdf) spells out the IRS’ suggested procedures for locating missing participants and beneficiaries.
  • Follow the plan documents procedures for resolving claims and disputes.

 2001 Egelhoff v Egelhoff: Washington State Supreme Court upheld a state appellate court ruling that ERISA preempts a state statute that provides the beneficiary designation of a spouse for non-probate assets such as life insurance and pension plans is automatically revoked upon divorce.

2009 Kennedy v. the Plan Administrator for DuPont Savings and Investment Plan: the US Supreme Court held that qualified plans may rely only on plan terms and beneficiary designation forms to determine proper receipt of benefits and therefore ignore a divorce decree.