Beneficiary Designations - Employer's Perspective

Beneficiary designations are a small detail with an outsized impact on retirement outcomes. When they’re missing, outdated, or misunderstood, 401(k) assets can end up delayed, disputed, or paid to unintended recipients, creating stress for families, and administrative and fiduciary risk for employers. Let’s highlight the most common beneficiary-related challenges plan sponsors encounter, and outline practical, proven ways employers can help participants get it right, reduce future problems, and support smoother plan administration.

Common Problems with Beneficiary Designation Forms

• Not having the beneficiary designation form on file. This can be commonly overlooked when employees first sign up for their retirement plan, especially if they do not know all the information needed. Without having a beneficiary listed, the plan’s default rules will go into effect (for example, it will go to a spouse or to the estate). This can also cause an extra administrative burden and fiduciary risk. It can take time and resources to track down rightful heirs and to process probate claims. Additionally, without a clear designee, the chances of competing claims or legal challenges increase. It is important that participants name contingent beneficiary(ies) in addition to primary beneficiary(ies), in the event that the primary beneficiary(ies) predeceases the participant.
• Outdated beneficiary designations after life events. Major life events: marriage, divorce, having or adopting children, etc. come with many changes. Employees who fill out the beneficiary forms when enrolling often forget to revisit it when they have life changes or if a beneficiary predeceases them. This can have unintended consequences. The plan sponsor must pay benefits to the person listed as beneficiary, even if it is no longer the participant’s wishes. Employers could possibly get brought in unwillingly if a family dispute escalates to a lawsuit.
• Divorce or remarriage conflicts. This has the potential to be the most contentious scenario if there is a divorce or remarriage and the participant forgets to update their beneficiary. ERISA requires that the plan must pay the beneficiary listed on the last valid form. This has been a leading cause of beneficiary litigation.

Kennedy v. Dupont is perfect example. Kennedy failed to remove an ex-wife as a beneficiary and upon his death the plan paid the ex-wife, even though she had waived her interest in the pension during the divorce. The Supreme Court upheld the decision that the company correctly paid out the benefits according to the plan document. [1]

Best Practices to Reduce Risk and Help Employees

While these issues are common, there are simple steps that can keep employers prepared so that beneficiary designations run smoothly. In plan administration processes, it is important to add a note to review and monitor beneficiary status. Most recordkeepers have a report that will allow employers to see participants and their designated beneficiaries or even see if there is one missing.

Implementing consistent steps to review beneficiary designations periodically can help protect your participant’s intentions, save time and potential administrative cost, and prevent confusion in the future. If you have any questions about your plan’s beneficiary designation language or forms, please reach out to the Brown Edwards Employee Benefits Service team.

[1] Supreme Court Refuses to Enforce Ex-Spouse's Waiver of Plan Benefit | Barclay Damon