Despite efforts by plan sponsors and third-party administrators/plan recordkeepers to communicate to defined contribution retirement plan participants the importance of designating a beneficiary to receive any remaining vested account balance upon their death, some participants simply fail to do so. In the absence of a participant’s valid beneficiary designation, the plan’s default beneficiary hierarchy will apply. Similarly, if no designated beneficiaries survive the participant, or if a designated beneficiary disclaims their interest in the account and there are no other surviving designated beneficiaries, the plan’s default beneficiary hierarchy will apply.
This post outlines practical considerations for plan sponsors regarding their defined contribution plan’s default beneficiary hierarchy.
Keep it simple. Consider the following two default beneficiary hierarchy provisions:
#1: first to the participant’s surviving spouse, but if none, then to the participant’s estate.
#2: first to the participant’s surviving spouse, but if none, then to the participant’s surviving descendants (i.e., children and grandchildren), but if no surviving spouse or descendants, then to the participant’s estate. (We have even seen hierarchies stating that before the remaining vested account balance goes to the participant’s estate, it would go to the participant’s surviving parents.)
In our experience, hierarchy #1 is more common, but many plans include hierarchy #2. Hierarchy #2 is far more complicated to administer because if there is no surviving spouse, it would mean additional expense and time trying to identify, locate, and verify the participant’s descendants and, if necessary, parents. If a descendant is identified but their whereabouts are unknown, the plan would have to undertake a diligent search to find them (and the plan administrator should document the steps taken to find them). To verify and document that all surviving descendants have been identified, a prudent plan administrator might require a notarized affidavit from each identified descendant, stating that there are no other surviving descendants (other than those identified in the affidavit).
In addition, hierarchy #2 raises the issue of whether distribution to the descendants would be made on a per capita or per stirpes basis. If the plan document is silent on this issue, whichever way the plan administrator interprets it, the interpretation affects how much each surviving descendant would receive, creating a risk of disputes.
Plan Amendments. If your plan includes hierarchy #2 and you want to change to hierarchy #1, the effective date for the change should be prospective (e.g., effective for participant deaths occurring on or after the date the amendment is adopted). In addition, make sure the third-party administrator/plan recordkeeper is informed of the change.
If your plan is on a pre-approved plan document, typically there is an addendum to the adoption agreement (or a set of administrative procedures accompanying the adoption agreement) that permits a plan sponsor to override the default beneficiary hierarchy set forth in the basic plan document by specifying a different hierarchy. If there is no such addendum or set of administrative procedures, and you want to change the default beneficiary hierarchy, you should contact the pre-approved plan document provider and request a superseding provisions addendum to the adoption agreement to override the hierarchy set forth in the basic plan document.
Take care when moving onto a new recordkeeper’s plan document. When moving to a new third-party administrator/recordkeeper, plans are often restated onto that provider’s pre-approved plan document. Time and again, we have seen unintended changes to a plan’s default beneficiary hierarchy as a result of the plan restatement. Don’t overlook the new plan document’s default beneficiary hierarchy in the plan restatement process.
Disclose the default beneficiary hierarchy in participant communications. Consider disclosing the plan’s default beneficiary hierarchy in the summary plan description and beneficiary designation form. Doing so may encourage participants to make an affirmative beneficiary designation because they may not like the default order. In addition, plan sponsors should consider providing periodic reminders to participants to make a designation and explain what will happen if they fail to do so, and to check their existing beneficiary designation and update it as appropriate. If the plan recordkeeper can do so, the periodic reminders to make a designation could be targeted only to those participants with no beneficiary designation.
