National Beneficiary Designation Awareness Day

Quick! What do you think of when someone says “estate planning?”

“Wills,” definitely.

“Trusts,” maybe.

But probably not “beneficiary designations.”

Those are odds that speakers on a recent NICSA webinar would like to change. Moderator Ann Plank from Franklin Templeton, panelist Meghan McGuire from OppenheimerFunds and panelist Thomas Rowley from Invesco want beneficiary designations to be top of mind for investors making estate plans.

Beneficiary designations determine where balances in defined contribution retirement plans go after an account holder’s death. With more and more Americans saving an increasing amount of dollars through IRAs and 401(k)s, beneficiary designations have become a critical component of estate plans.

Notably, it’s only the beneficiary designations that matter when it comes time to distribute assets – as many families learn too late. The panelists summarized one example of a divorced couple getting an unexpected surprise — in a case that reached the Supreme Court. The couple’s divorce decree explicitly removed the ex-wife’s rights to her ex-spouse’s retirement assets. Unfortunately, the ex-husband never changed his beneficiary designations – which meant that his ex-wife was entitled to his account balances on his death. Not exactly what he had in mind!

So it’s extremely important that beneficiary designations be right – but, all too often, they aren’t. The panelists talked about the reasons for the errors, which fall into 4 main categories:

Reason #1: Modern families are complicated. Today, fewer than 1 in 4 American households look like the Cleaver family – with Mom, Dad and one or more kids. As a result, default beneficiary instructions – such as “everything to the surviving spouse” – aren’t always a good fit for the modern family.

Reason #2: The laws are complicated. And is that a “spouse” under federal law? Or state law? And which state is that? There’s a welter of laws and regulations – at both the state and federal level – governing inheritance-related issues.

Reason #3: Provider rules are complicated. Adding to the muddle, each retirement plan provider has its own rules regarding required documentation – and that doesn’t just mean slightly different beneficiary designation forms. Since many Americans have more than one retirement account, that can mean confusion for both investors and their heirs. Want to name a trust as the beneficiary? Some providers require trust documentation, while others don’t. (I’ve had personal experience with this.)

Reason #4: Investors don’t review their beneficiary designations often enough. Too many beneficiary designations use dollar amounts that don’t match the current value of the accounts or name heirs that are already deceased.

There’s light on the horizon, however. As the panelists noted, the fund industry is working to make it easier for investors to maintain their beneficiary designations:

  • Online access. More and more firms have made beneficiary designations available online – and have made it possible for investors to update them without needing a paper form.
  • More standardization. NICSA’s Retirement Committee has surveyed fund industry providers about their rules, in an effort to encourage greater uniformity – making life easier for investors.

Yet industry efforts will be for naught if investors still don’t see beneficiary designations as important and update them regularly. Join the panelists in supporting the establishment of:

A recording of the webinar is available here.

Highlights of the Retirement Committee’s survey are in the webinar slides, also available here. Full survey results will be released shortly.

NICSA: 8400 Westpark Drive, 2nd Floor McLean, VA 22102 • Tel: 508.485.1500 • Fax: 508.485.1560