Beneficiary designation is a critical, yet often overlooked aspect of retirement plan savings accounts, especially since for most Americans, these accounts form one of their largest and most significant assets. Adequate attention is not often given to naming and updating the beneficiaries for these accounts.
Beneficiary designations, if managed poorly or left unattended, can have serious legal implications. These include unexpected transfers of wealth, the triggering of additional tax implications, or contentious litigation disputes. Therefore, the role of plan sponsors is crucial to ensure the best practices in relation to beneficiary designations.
Bricker Graydon LLP explores this theme in depth in their article, “Beneficiary Designations – Plan Sponsor Best Practices“. They suggest that plan sponsors should encourage plan participants to carefully review and update their beneficiary designations regularly, and especially after major life events. Major life events that may necessitate changes in beneficiary designations include but are not limited to: marital status changes, such as divorce or remarriage; the birth or adoption of a child; or even the death of existing named beneficiaries.
Furthermore, the need for legal assistance is paramount in cases where plan participants want to designate beneficiaries who are minors, or beneficiaries with special needs, as there are particular legal considerations that must be addressed in these instances.
As professionals entrusted with the administration of these retirement plans, it is imperative that plan sponsors stay aware of these considerations, and ensure that they are communicated effectively to the plan participants. By doing so, plan sponsors not only perform their fiduciary responsibilities correctly, but also minimize the potential for costly and time-consuming litigation.