Are you certain you are leaving your hard earned money to the desired person?

Are you certain you are leaving your hard earned money to the desired person?

by Lona Ebert, CPA,  Bronfman E.L. Rothschild


An important, yet often overlooked, aspect of an employer-sponsored retirement plan, like a 401(k), is designating a beneficiary—someone your money will go to when you die. Industry data suggests that the majority of retirement plan participants do not have a beneficiary designation on file.

What is a beneficiary designation and why is it important?
The beneficiary is the person who would “benefit” or receive your retirement account should something happen to you. If you are participating in your employer’s 401(k) plan, typically your employer will have a form (paper or electronic) that you fill out to name a primary beneficiary and contingent beneficiary (as appropriate). Your employer will keep a copy of the form in their records, and so should you. You may select multiple people as your beneficiaries. You can also name a trust or charity.

While many may name a beneficiary when they first open an account, few will review their elections or update when life changes occur.  We recommend you review your beneficiary form to make sure it is up-to-date every year. A good time to do this is when you file your tax return because it is a time when you are focused on your current financial situation. It is also critical to update your beneficiary designation at major life events, such as marriage or divorce. You want to make sure you check the beneficiary designation for all of your retirement accounts—your current plan, any retirement plan from a previous employer, and IRAs.

Keeping your beneficiary information updated is especially important in the event of divorce. Time and again, someone will get remarried, forget to update their beneficiary, and the previous spouse is still named as the beneficiary on the retirement plan. The person named as the beneficiary will receive the proceeds of the account, even if it is not the current spouse, and these are hard cases to overturn.

Naming your beneficiary of choice is easy when you set up the account, but may be more difficult later.  For example, we worked with an individual who thought he had a beneficiary form on file naming his children as primary beneficiaries for his retirement plan. He and his employer could not find a copy of the beneficiary form. Since Wisconsin is a marital property state, he needed to secure spousal consent to name his children as his primary beneficiaries. Due to marital discord, he was unable to get consent from his spouse and update the form to meet his wishes. This created a difficult situation he was unable to resolve to his satisfaction.

Employers are now beginning to deal with effects of the U.S. Supreme Court ruling in 2013 which expanded the Federal definition of spouse to include same-gender couples. The ruling means that legally married same-gender spouses now have the same spousal rights as opposite-gender spouses with respect to their company-sponsored retirement plan, regardless of where the participant resides. There are instances of same-sex individuals who are married, have children and want to name the children as primary beneficiaries of their 401(k) plan. Because of the expansion of the definition of the term “spouse” a spousal consent form is now required in order to designate the children as beneficiaries.

What Can Employers Do to Help?
When I work with employers, I recommend that they distribute beneficiary forms every year to any participant without a form on file during employee benefits or retirement plan education meetings. Then, follow up so they receive a form from every employee. It will save the employee and the employer time, money, and headaches in the future. And, if an employer has a form on file, I recommend they reach out to employees every five years to see if anything in their life has changed relative to their beneficiary designation. As basic as it sounds, the best practice is for the employer to keep an original copy of the signed form or the electronic form in the employee’s personnel file.

We work with employers to ensure that there is “ordering” language as a default mechanism in their retirement plan documents. The language should describe who will receive the proceeds of an account if there is no beneficiary documentation available. Typical ordering states that proceeds are distributed first to the surviving spouse, then to the employee’s children and finally the employee’s estate. Not all employer plans have this type of language in their retirement plan documents. And the standard language may not match the participant’s wishes.

Take Charge of Your Beneficiary Designation
When you start a new job, you are focused on learning your new job and signing up for your health insurance and other benefits. Many people may also make enrolling in the 401(k) plan a priority. Completing a beneficiary form is usually a separate procedure and not an initial priority. With no sense of urgency, as few people expect an untimely death, many beneficiary forms are never completed. The bottom line is a beneficiary designation is the first step in creating your estate plan. Everyone, not just the wealthy, need the basics of an estate plan, so make sure you have designated who will receive the proceeds of your retirement account upon your death.