The Importance of Reviewing Employees’ Retirement Account Beneficiary Designations

If your employees are currently participating in your organization’s retirement plan, kudos! Your retirement plan offering is a valuable tool for recruiting and retaining talent, as well as helping your employees prepare for their retirement.  But, what if something were to happen to him or her before they could enjoy the savings they’ve worked so hard for? Reminding employees to regularly review their retirement account beneficiary designations, and the types of beneficiaries, why they should designate a beneficiary and how to make sure to keep the beneficiary records updated is key.

Typically, when participants are married, their spouse would be their primary beneficiary and would be the one to inherit their retirement plan account, unless specified otherwise and the spouse agrees to that alternative designation in writing.

The backup beneficiaries are referred to as contingent or secondary beneficiaries. They would receive the employee’s retirement account if the primary beneficiary dies or for some reason declines the distribution.

The percentage of the account for all of the beneficiaries must equal 100%.  Keep in mind an employee can list as a beneficiary children, parents, siblings, friends, trusts, or charities. They may want to consider a trust if the child is a minor.

The main reason an employee should designate a beneficiary is to avoid probate court should the employee pass away without having beneficiary designations on record.  Your retirement plan document will specify a beneficiary hierarchy to follow in this case; however, this may not align with what the employee may have wished and many want to avoid probate.  The probate process can be very expensive and slow.  Probate court differs from state to state; it is not one size fits all. If the employee should die and has a retirement account balance, and did not designate a beneficiary, those retirement plan assets may be frozen until their will is validated and their estate is settled.

There are so many different life changes and scenarios that employees go through in their lives: marriage, divorce, having children, etc. It is a best practice to remind participants periodically during the annual open enrollment period to make sure their beneficiary designations are up to date.   Typically, your retirement plan investment platform will provide a log in to the employee’s retirement plan account online, and the employee is able to make their updates directly online. Another option can be filling out a paper form that is kept on file with your human resources department. These forms should be reviewed regularly to ensure they’re up to date.

Remember your employees work hard for their money (and often your employer contributions as well). What they put towards retirement is an important decision and their retirement plan account may be their biggest asset. Plans that follow best practices for keeping their employees’ beneficiary information up to date can help ensure the smooth transition of their assets to their intended recipients.

At Kushner & Company, we’re always here to answer any questions employers may have regarding best practices for their retirement plans.