When It Comes to 401(k) Beneficiaries, Where There’s a Will There Isn’t Necessarily a Way

Beneficiary designations are a critical yet often neglected aspect of retirement plans. Many participants mistakenly believe that their retirement plan assets will be distributed according to their will or trust. However, retirement accounts are governed by their own rules, meaning the named beneficiary on the account will typically inherit the funds, regardless of other estate planning documents.

The Consequences of Neglected Beneficiary Designations

Neglecting to update beneficiary designations can lead to unintended outcomes, such as an ex-spouse or estranged relative receiving the retirement savings. This oversight can cause emotional distress and financial complications for the intended heirs and may result in lengthy and costly legal disputes.

Best Practices for Plan Sponsors

Plan sponsors play a vital role in helping participants keep their beneficiary designations current and accurate. Here are key strategies to ensure that beneficiary wishes are honored.

Educate participants. Regularly communicate the importance of beneficiary designations to employees. Highlight that these designations override wills and other estate planning documents when it comes to retirement account funds.

Offer clear instructions and regular reminders. Provide straightforward instructions on how to designate beneficiaries when participants enroll in the plan. Send regular reminders to review and update beneficiary information, especially after significant life events such as marriage, divorce, or the birth of a child.

Simplify the update process. Make it easy for workers to update their beneficiary designations. Offer both online and paper options, and ensure the process is clearly described in the summary plan description (SPD).

Annual reviews. Encourage participants to review beneficiary designations annually. This can be done as part of regular financial wellness programs or during open enrollment periods.

Leverage technology. Use automated systems to remind employees to check and update beneficiary designations. An online portal where they can view and update this information can significantly reduce the risk of outdated designations.

Promote consultations with financial advisors. Encourage participants to consult with financial advisors to ensure their beneficiary designations align with their broader estate planning goals. This professional guidance can help address any potential oversights and provide reassurance.

Emphasize the SPD. Ensure that the SPD includes clear and concise rules for making and updating beneficiary designations. Communicate these rules effectively to both participants and their advisors to prevent misunderstandings and help ensure compliance.

Protecting Participant Wishes

Accurate and up-to-date beneficiary designations are essential for ensuring that retirement assets are distributed according to participants’ wishes. Plan sponsors have a responsibility to educate and assist workers in maintaining these designations. By implementing best practices such as regular education, clear instructions, technology-driven reminders and emphasizing the importance of the SPD, plan sponsors can help safeguard the financial futures of their employees’ loved ones, providing greater peace of mind for all involved.

Sources

https://www.morningstar.com/personal-finance/dos-donts-beneficiary-designations