A Quick Reminder: Three Best Practices for Beneficiary Designations

Three best practices for plan administration that often fall by the wayside include: (1) regularly reminding participants to review and update their beneficiary designations; (2) checking recordkeeping practices to avoid loss of beneficiary designation information; and (3) acquiring identifying information for designated beneficiaries.  Implementing these three best practices could save plan administrators significant costs and headache.

1. Periodic Beneficiary Designation Reminder

Problems arise when plan participants fail to update their beneficiary designations after a change in circumstances (such as marriage, divorce, childbirth, or adoption).  Plan administrators should be cautious when dealing with non-plan documents arising from such events that purport to waive or establish a right to benefits under the plan. 

In Kennedy v. Plan Adm’r for DuPont Sav. and Inv. Plan , 555 U.S. 285 (2009), the Supreme Court held that a plan administrator properly carried out its fiduciary duties when it paid benefits to the former spouse of a deceased participant despite the existence of a divorce decree which purported to divest the former spouse of any interest in the benefit.  The Court reasoned that the divorce decree did not constitute a waiver of the former spouse’s interest in the benefit because it did not operate as a qualified domestic relations order (“QDRO”) or as a plan document.

The result of Kennedy is that, unless participants properly designate new beneficiaries in accordance with plan documents (or QDROs), plan administrators might be obligated to pay benefits to “outdated” designated beneficiaries.  To avoid this headache, plan administrators may want to periodically remind participants to review and update their beneficiary designations.

2. Check Recordkeeping Practices

Privacy protection laws are placing new pressures on businesses to protect the information of certain individuals and some businesses may be coping by adopting information deletion policies.  For example, a business might choose to delete employee information that is older than 5 years rather than pay the costs of protecting it.  While such practices might assist with privacy law compliance, employers may inadvertently delete information necessary for proper plan administration, such as beneficiary designation forms.  Plan administrators and sponsors might consider coordinating with the appropriate human resources personnel to ensure that plan documents and information such as beneficiary designations are retained despite any information deletion policies of the business.

3.  Acquire Identifying Information for Designated Beneficiaries

Plan administrators may encounter trouble with benefit administration when participants designate a beneficiary but fail to provide adequate information to identify that individual.  For example, a plan administrator might struggle to identify a participant’s designated beneficiary if the designation merely states the name “John Smith” without additional information.  Plan administrators might consider ensuring that beneficiary designation forms require sufficient identifying information for the designated beneficiary, such as contact information, address, or relationship to the participant.

Though implementing these three best practices may require some additional effort, they could save plan administrators time and money in the future by avoiding potentially substantial administrative issues.