Beneficiary Designations: 3 Things Plan Sponsors Can Do

It’s important that a 401(k) participants account is paid out in accordance with their wishes if something happens to them. We highlight three things a plan sponsor can do for their participants regarding up-to-date beneficiary designations.

Retirement plan sponsors have many levers they can pull to help shape participants’ retirement outcomes. While decisions around enrollment, matching contributions and investment choices are within a plan sponsor’s control, there’s one area where their hands are largely tied: beneficiary designations (transferring plan assets to a participant’s beneficiaries).

That’s because it’s a participant’s responsibility to name beneficiaries and keep their designations up to date. Plan sponsors would want to ensure a participant’s wishes for the transfer of their assets are fulfilled, especially at such a critical time for a spouse or a family member. Yet, there’s little that plan sponsors can do for beneficiaries after an account owner passes away. A recent court decision cited below underscores this fact.

Beneficiary Designations, Defined

Before discussing the case in question, let’s review the definition and some basic rules about beneficiaries.

A beneficiary is a person or legal entity entitled to receive the proceeds from a retirement account, life insurance policy, trust or another type of account upon the death of the account owner. Designating a beneficiary is a personal choice.

Designating beneficiaries is an easy, effective and inexpensive way to transfer assets from an account owner upon death. That’s because beneficiary designations take precedence over any instructions included in an individual’s will regarding the transfer of wealth. Assets that can be transferred through beneficiary designations do not have to go through probate, which can be a time-consuming and costly legal process.

Retirement plan sponsors cannot make beneficiary designations on behalf of plan participants. Nor can they override a plan participant’s instructions to direct an account owner’s assets in a different manner than instructed. What plan sponsors can do is strongly encourage plan participants to designate beneficiaries for their retirement account upon enrollment and regularly remind them to keep these are current. Annual reminders are a good practice, but it’s also a good idea to remind participants to review their designations after significant life events such as marriage, the birth of a child, divorce and more.

Plan sponsors can make this process easier for participants—and avoid legal troubles for themselves—by having clear and concise rules for beneficiary designation changes in the summary plan document (SPD) and making sure they are understood by both participants and those that advise participants. The following recent court case demonstrates why.

Case Study: Ruiz v. Publix Super Markets

In this case, the plan sponsor, grocery retailer Publix, had stated clear instructions for participants in their 401(k) and ESOP plans about changing beneficiaries on their accounts. In the SPD’s for both plans, the plan sponsor directed participants to complete and sign a “beneficiary designation card” and submit it to the plan sponsor’s office. No beneficiary changes would be made until a “properly completed” beneficiary designation card was received.

The plaintiff, in this case, Arlene Ruiz, was named as a beneficiary on a former Publix employee’s retirement account or thought she was when the former employee sought to change her existing beneficiary designations for her 401(k) and ESOP accounts. (The former employee, Irialeth Rizo, had remained a participant in both plans after separating from service.)

Ms. Rizo, the participant, had called a plan representative for instructions on how to change beneficiaries, but the instructions provided were inconsistent with what was outlined in the SPD. The participant was told to submit a signed letter along with the beneficiary designation cards, which she had done. However, instead of signing the card, as specifically directed in the SPD instructions, the participant had written “as stated in letter” on the signature line.

As a result, the plan sponsor’s office did not change the participant’s beneficiary designations when they received the letter and improperly signed cards. When the participant passed away soon after, the plan sponsor distributed her account assets to the previously named beneficiaries.

The judge in the case ruled against the plaintiff and in favor of Publix, the plan sponsor, and defendant. Even though a plan representative gave the participant misleading instructions for changing beneficiaries, the plan sponsor remains bound to abide by the directives of the summary plan document. For Publix, that meant no changes unless they receive signed beneficiary designation cards. Even “substantial compliance”, which the participant did achieve in the eyes of the court by including both the letter and beneficiary designation cards, was not sufficient to find in favor of the plan participant.

A Legal Win That’s No Victory

Even though the court awarded in favor of the plan sponsor, it appears no party in this lawsuit came out as winners. Not the chosen beneficiary made by the deceased participant who’s wishes were not fulfilled for the transfer of assets. And not the plan sponsor either, who would have surely complied with the participant’s request, had it been completed properly. They also may have sought to remedy the situation however, the participant passed away just after submitting her beneficiary change request.

But this case highlights three areas where plan sponsors can help plan participants ensure beneficiary designations are in place that reflects their wishes. First, clear instructions as outlined in the summary plan document are essential. If a plan sponsor wants to allow some flexibility in naming beneficiaries—by letter or by a form, for example—then this option should be written into the instructions in the SPD.

Second, any instructions given to plan participants about changing or naming beneficiaries should follow the rules exactly as directed in the SPD. That would include written instructions given to participants at enrollment or in regular reminders, or verbal instructions given by plan representatives.

Third, plan sponsors can redouble their efforts to encourage participants to keep their beneficiary designations up to date. Although this wasn’t necessarily an issue in the Publix case, plan sponsors can easily find themselves in the same type of legal suit from slighted beneficiaries.

Plan participants often follow a “set it and forget it” mindset when it comes to their retirement plan assets. They shouldn’t succumb to inertia with their beneficiary designations.