Filing out a beneficiary designation form seems like a simple task. And in all honesty, it is; you simply list the name of the person or persons you want to inherit the account, designate percentages, make sure they add up to 100%, and then sign and date the form. However, getting this message across to participants is different story. And any plan administrator or trustee of a multiemployer plan can explain how these challenges are amplified in a collectively bargained setting. While this issue only affects defined contribution plans, it is critical that participants are aware of these rules.
One particular horror story played out in the 5th Circuit Court of Appeals in the case of Herring v. Campbell, 690 F.3d 413 (5th Cir. 2012) and involved a pension plan worth over $300,000. The participant completed a beneficiary form naming his spouse as the sole beneficiary. However, his spouse died, and the participant never bothered to update the form. Just one year later, the participant also died.
After his death, the participant’s stepchildren contacted the plan looking to inherit the account. Since the only person named on the beneficiary form had predeceased the participant, the plan administrator had to use the plan’s default rules. The plan used a standard set of rules, which carried the following priority:
- The surviving spouse;
- Surviving children
- Surviving parents
- Surviving brothers and sisters
- The participant’s estate.
The plan did not define “children,” so the administrator was forced to make a determination: do stepchildren count as “children?” After considering the issue, the plan administrator determined that stepchildren should not be included and distributed the plan account to the participant’s surviving brothers and sisters.
The stepchildren objected and took the matter to court. At trial, they pointed to their long relationship with the participant, the fact that he had left everything in his estate to them, and that he described them in his will as his “beloved sons.” Despite this evidence, the Court rejected the argument and upheld the plan administrator’s decision. That meant the “beloved sons” received nothing from the participant’s retirement account.
The Herring Court was following the guidance laid down by the U.S. Supreme Court in Kennedy vs. DuPont, 129 S. Ct. 865 (2009). In that case, the Supreme Court upheld the plan administrator’s decision to award the participant’s account to his ex-spouse. While she had waived her right to the account in the divorce decree, she was still listed as the named beneficiary on the plan’s designation forms. This decision excluded the daughter, who not only inherited his estate, but was also listed as the named beneficiary for a different plan sponsored by the same employer (she received that account). Essentially, the plan administrator is free to ignore this extraneous information and rely on the terms of the plan and the designation forms on file.
To avoid these terrible situations, all either participant had to do was update the beneficiary form. Once they died, it was too late. Participants should be aware that any major life change warrants a review of a previous beneficiary designation. Birth, adoption, marriage, divorce, and the beneficiary’s death are all common events that should trigger a review. However, financial circumstances should also be considered; for example, the named beneficiary may no longer need the full account balance or may be unable to manager his or her affairs.
Another approach would be to name a contingent beneficiary (if the Plan allows). These beneficiaries would serve as a back-up plan if a situation like Herring arises. They also give the primary beneficiary a better reason to disclaim all or a portion of your account.
Trustees and plan administrators can make sure that beneficiary designation forms are frequently sent to participants, that communications remind participants of their previous designations, and they can follow-up with participants who do not respond to initial requests. However, as the old saying goes, “you can lead a horse to water, but you can’t make it drink.” Hopefully, if participants are aware of the gravity of their decision, they will not make the mistakes made in Herring or Kennedy.