Don’t Sing the Beneficiary Blues

Ultimately, a retirement plan exists to support the account holders and their dependents and beneficiaries. So distributions are of key importance — but that doesn’t mean that handling them is always smooth. A recent blog entry offers some ideas on how to handle difficult situations concerning that most crucial of functions.

In “When a Retirement Plan Has the Beneficiary Blues,” Sheila Ninneman writes in a post on the blog of the Findley HR/benefits consulting firm that problems with distributions are all but inevitable. “If you’ve administered a retirement plan for any length of time, then you’ve probably ‘sung the blues’ at some point when it comes to distributions to beneficiaries,” she writes, continuing that a variety of complications can cause one to “know the pain of the beneficiary blues.”

Ninneman offers three ideas on how to avoid those blues.

Review plan provisions. The first thing to do, says Ninneman, is to review the provisions of the retirement plan and make sure that it has a default beneficiary provision — one that addresses what happens when a participant fails to name a beneficiary. If it doesn’t, she suggests taking these steps:

• Amend the plan to add such a provision.
• Set out an order of priority regarding to whom funds will be distributed under such circumstances.
• Reference the order of priority state law sets for such a situation.
• State that all of a participant’s prior designations are are revoked if a properly completed beneficiary designation form is submitted to the administrator.
• State that a participant’s prior designation of a then-spouse as beneficiary are revoked if there is a divorce decree.

Review forms carefully and immediately. Ninneman suggests carefully and immediately reviewing beneficiary designation forms. She adds that creating a checklist of review steps may be helpful in that review. Careful review, she argues, will head off difficult situations such as those that arise when a participant makes mathematical errors in the percentages to be designated to beneficiaries.

Weigh matters carefully. Remember that one must carefully consider all circumstances when assessing a beneficiary designation form. One must obtain all the information necessary, but one also must be prepared to make a preliminary determination, balance risks and costs, and exercise judgment in processing a determination appropriately.

“Remember you’re wearing your fiduciary hat,” Ninneman adds to emphasize the importance of properly handling designations. “Keep in mind that directing the distribution of retirement plan benefits is a fiduciary act.”