When a 401(k) plan participant dies, his or her designated beneficiary is generally entitled to receive the vested interest in the participant's account. Simple, right? However, what happens if the participant fails to update their beneficiary designation due to a life event (marriage or divorce) prior to death? The participant's failure to update his or her beneficiary designation after a life event can often result in the participant's wishes not being followed by the plan administrator, disputes between competing beneficiaries, and the potential for claims for breach of fiduciary duty under ERISA.
Scenario: A current or former plan participant names his children the beneficiary of his or her vested account balance. Years later, the participant marries. Prior to his death, the participant engages in some estate planning and names a trust as the new beneficiary of his 401(k) vested account. The participant dies without having changed the beneficiary designation from his two children to the trust. Expecting to receive the account balance, the trustee files a claim for benefits. Clearly, the deceased participant intended the trust to receive the vested account balance. However, the children are the only beneficiaries on file in the plan's administration system. Should the plan administrator pay the benefits to the trust or to the children?
Response: Neither. In accordance with ERISA, because the spouse of a married participant is deemed to be the designated beneficiary unless the spouse has consented in a writing (witnessed by the plan administrator or a notary) to a different beneficiary, the spouse is entitled to the participant's vested account balance. Here, although the participant intended that the trust be the new beneficiary, because his current spouse did not consent to waive her rights in favor of the trust, she remains entitled to the benefit.
Action: The scenario above is not uncommon. The failure to update beneficiary designations can result in the decedent's intent not being carried out. Because plan administrators, as ERISA fiduciaries, are compelled to follow the terms of the plan and the requirements of ERISA when deciding benefit claims, all employees should be encouraged to review and update all 401(k) plan and group life insurance plan beneficiary designations. Ideally, employers would know when a life event occurs and contact the employee. However, because plan administrators may not know every employee's life events as they occur, we recommend that employers remind employees to confirm their beneficiary designations every year during annual enrollment. Whether the 401(k) account balance or the life insurance benefit is a minimal amount or several hundred thousand dollars, the payment of such benefits to an "unanticipated" beneficiary can lead to heated conversations, unnecessary litigation and legal fees.