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Beneficiary Blunders: Aligning Participant Intent with Plan Technicalities

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January 17, 2019 | Jennifer Namazi

Beneficiary Blunders: Aligning Participant Intent with Plan Technicalities

The arrival of a new year signifies several things – for some it’s a time of resolutions and goal setting. For others, it’s more of an “out with the old, in with the new” moment. Along the lines of the latter, I view the New Year as a time for housekeeping – an opportunity to check in some things that might need literal or figurative dusting.

When it comes to stock plans, one area that’s prime for a check in (and dust clearing) is that of beneficiary designations. A primary reason for this is that these designations can be filled out when a participant joins a plan, and then left untouched or forgotten for years. At least that’s how I’ve long viewed the designations – as often forgotten. I recently came across an article (“How to Avoid Costly Beneficiary Designation Litigation – Helpful Hints for All Benefit Plans” (Labor & Employment Law Perspectives Blog, Foley & Lardner LLP - April 10, 2017)) that raised my awareness to another angle in maintaining beneficiary designations – and that is the need for precise compliance with the guidelines and process for submitting and changing such designations. As we’ll see below, just “substantially” completing the necessary information to update a beneficiary designation is not enough.

Reminding stock plan participants that these designations exist is an important aspect of beneficiary maintenance. Another key component is one that I suspect may be underestimated – the need for exactness in making changes to a designation. Simply reminding employees to keep their designations updated may not be enough to truly aid the participant in aligning their intent with the technicalities required to successfully update a beneficiary designation.

A few key things to remember about beneficiary designations in general:
  • They are usually considered legal documents (no legal advice intended here, as I’m not a lawyer.)
  • As with many legal documents, there are usually precise standards that must be met in order to be considered properly complete
  • The Supreme Court has previously weighed in on beneficiary designations - in a 2009 ruling in Kennedy v. Plan Administrator for Dupont Savings and Investment Plan. In their ruling (as described in the above referenced Foley blog), “the Supreme Court instructed that one of the purposes of The Employee Retirement Income Security Act of 1974 (ERISA), with respect to a written plan document is to inform employees of their rights and obligations under the plan. When there is a beneficiary dispute, the plan’s written terms must be followed, to save the plan and its sponsor from costly litigation, avoid double liability, eliminate the need to examine and evaluate extrinsic documents to discern an employee’s intent, and to make sure that benefits are paid quickly.” [emphasis added] Although stock plans are generally not subject to ERISA, some stock plan administration practices (including those of beneficiary management) follow or align with practices in place for ERISA plans. This seems to be the case with beneficiary practices and for this purpose, we can consider the Supreme Court’s ruling to be relevant from a best practice standpoint.
  • The instruction to follow the plan’s terms means literally – down to the letter. If there is a prescribed process to follow, then the process must be followed exactly as spelled out. This is where I want to focus our attention.
In a more recent court case, Ruiz v. Publix Super Markets, Inc. (2017), the outcome makes it seem clear that precision in following beneficiary designation instructions is crucial in order to avoid unintended outcomes. In that case, a plan participant had made her final wishes clear – at least it seems she thought she did. The details of this case are described in the Foley blog and are worth a read if you have the time.

The essence of the Ruiz case hinges on technicality – precise following of instructions on how to properly complete a beneficiary designation. A plan participant was terminally ill with cancer, and wanted to change her beneficiary designations for both her 401k and ESOP plans with a former employer. She contacted the employer and was given instructions that since she was a former employee, she should write a letter conveying her intent to change the beneficiaries - along with some detailed identifying information (letter needed to be signed, include SSN and other details). In addition, she was told that if she could locate a beneficiary card, she could also make the update by submitting a new beneficiary card for each plan.

The prudent former employee did both – she wrote a letter that included the exact information instructed. She also took it a step further and completed beneficiary cards to submit with her letter. Instead of fully signing the new beneficiary cards, she just wrote “As stated in letter” on them likely thinking (I’m logically guessing) that her letter met the necessary requirements to change the beneficiaries. The lesson in this example comes from what happened next. The participant mailed the letter and updated beneficiary designation cards. The next day she passed away. Where things go awry is that because the plan had specific instructions for completing beneficiary cards, and because the cards were not completed exactly as required (plan requirements not precisely followed), those cards were not valid to update the beneficiaries. Long story short – the original beneficiaries received the proceeds from both plans. In the court’s ruling in this case, “the opinion concluded that it does not matter if a participant ‘substantially complies’ with designation procedures. Instead, a designation will not be changed unless the plan’s specific requirements are precisely followed.” [emphasis added]

In reading about the Ruiz case, it seemed clear to me what the participant’s intent was in trying to update their beneficiary designations. This is where we have to realize that intent does not always convey when it comes to the letter of the law or plan rules. So how do we better align participant intent with the precise requirements of that plan or process? Here are some thoughts:
  • Read and re-read your plan’s language on beneficiary designations. Some plans may have detailed instructions or language, others may not. It’s important to know exactly what your plan says on the subject.
  • If a specific process for completing and updating forms has been defined, ensure your practices are in alignment. This is particularly true where a plan might be years old and practices might have changed or evolved over the years.
  • Ensure third party administrators have clear and consistent instructions to relay to participants who inquire about making changes to their beneficiary designations.
  • Communicate with participants in advance about the importance of keeping their designations updated, and the critical nature of ensuring any updates are in precise compliance with the prescribed process.
  • Ask your legal counsel to periodically review the plan terms in conjunction with messaging and processes associated with maintaining beneficiary designations.
  • If there are multiple types of plans at your company (including non-stock plans) that have designated beneficiaries, it will be important to clearly define the exact process for maintaining each type of designation.
If you’re able to include beneficiary maintenance in your housekeeping plan this year, take a moment to look at your plan terms and company practices and contemplate how to keep participants informed about the details – aiming to avoid blunders and bridge any gap between participant intent and the required process to implement that intent.


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