Do You Have Updated Beneficiary Designation Forms From Your Participants?

Most retirement plans require that participants designate a beneficiary who is entitled to receive their plan benefits upon the participant’s death. The designation is typically done when the participant first enrolls in the plan. Often, participants fill out the beneficiary designation forms during this initial enrollment period and never revisit these designations after life-changing events, such as marriage, divorce, or birth of a child. To illustrate, a

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participant who is single and without children at the time he or she fills out the beneficiary designation form may choose his or her siblings as beneficiaries. However, when he or she marries and gives birth or adopts a child, he or she would likely prefer to designate her spouse and her children as beneficiaries. The same holds true for a participant who names his or her spouse as a beneficiary but later divorces and remarries. After the re-marriage, the participant would probably prefer his new wife over his ex-spouse as the beneficiary. In cases where the participant fails to update his or her beneficiary designation form, these initial designations may not always reflect the participant’s true intention and it often results in conflict between spouses and family members.

Unfortunately, an outdated beneficiary designation is not only a problem for the participants and beneficiaries involved. It also creates an issue for fiduciaries because they must identify the correct beneficiary in order to fulfill their fiduciary duties. While fiduciaries are not required to become mind readers, they are required to take steps to determine the proper beneficiary. This can be costly as some of these disputes are resolved through legal proceedings. In addition to the litigation cost of trying to figure out who is the proper beneficiary, plans that make payment to the wrong beneficiary can be put in a position where they are forced to a make double payment, initially to the wrong beneficiary and then subsequently to the correct beneficiary.

As a result of the myriad of issues associated with outdated beneficiary designations, a good way for sponsors to reduce the chance of problems arising is to make sure they have up-to-date beneficiary designations for participants. This can be done by periodically sending out a reminder to all participants to update their beneficiary designation. The reminder should also emphasize to participants the importance of having a current beneficiary designation on file. For participants who are terminating employment, the plan sponsor can verify prior to the participant leaving that the employer has an updated beneficiary designation form for the participant. If terminated participants do not eventually rollover their account balances to their new employer or an IRA, the plan sponsor should also send periodic reminders to these participants to update their beneficiary designations.

Although some plans have default beneficiary designations, participants may not always be aware of these default designations. For instance, some plans automatically revoke the spouse as a beneficiary after a divorce unless the participant reaffirms in writing that he or she wants the ex-spouse to remain as a beneficiary. If no such re-affirmation is made, the default designation can be the new spouse, the children, or the participant’s estate. While these default beneficiaries would be acceptable to most participants, it is important to make participants aware of the existence of these defaults and revocation provisions.

The bottom line is that beneficiary designations should be taken seriously by both participants and plan fiduciaries. Having current beneficiary designation forms on file can ensure that the participant’s intentions are carried out. It will also lower the risk of the plan fiduciary paying benefits to the wrong beneficiary or paying to locate the correct beneficiary.

Founded in the 1950s, Carroll Consultants, Ltd. has experienced professionals with a wealth of knowledge about retirement plans. If you have any questions about this article or our services, please contact Marcie Carroll, at, or (610) 225-1210.