Update Beneficiary Designations in Retirement Plan Documents

Many members of the baby boomer generation are experiencing significant and perhaps abrupt transitions in their family status.  Their children have left home to lead independent lives.  Spouses have retired or perhaps even moved on to become ex-spouses.  Changes in boomer families can create a need for changes in your retirement plan documents.  

This point is emphasized in a recent decision by the U.S. Supreme Court.   In this 2009 case (Kennedy v. DuPont Savings and Investment Plan), a spouse divorced in 1994 was awarded all rights to her ex-husband’s retirement plan benefits (in a dispute with his daughter) even though the ex-wife had waived all claims to the benefits in the divorce decree.  The problem is that prior to the the death of her ex-husband in 2001, he had failed to change the beneficiary named in the plan documents.  Thus, all of his $400k in retirement benefits went to his ex, and none to his daughter.  Ouch.  Talk about unintended consequences!

Also, even if you specify in your will how your retirement plan benefits are to be distributed, your will cannot override a beneficiary designation in the plan documents themselves. 

So what retirement plan documents should baby boomers be reviewing?

Primary beneficiary designations on qualified defined contribution plans.

These include 401(k), 403(b), SEP, and similar plans. (Note that a spouse must generally provide written consent if you attempt to remove him/her as primary beneficiary on a qualified defined contribution plan.)

Primary beneficiary designations in qualified defined benefit (pension) plans.

Again, you will generally have to obtain spousal consent to name someone other than your spouse.

Contingent beneficiary designations in qualified defined benefit and contribution plans.

A contingent beneficiary is named to cover circumstances where your primary beneficiary pre-deceases you or dies in a joint accident with you.   When boomers were younger, they would often designate minor children (or a trust for minor children) as a contingent beneficiary.  If the children are now grown up, you will probably want to change your contingent beneficiary, perhaps by naming your estate.  That way, your will can be used to determine where your retirement benefits will go upon your death.

Primary and contingent beneficiary designations for IRA balances.

The rules for rolling over an inherited IRA vary depending on whether the beneficiary is or is not a spouse.  The status of the beneficiary can also affect the application of required minimum distribution rules.  Thus, baby boomers should carefully consider their options when updating designations of IRA beneficiaries.  For more guidance on this issue, consult IRS Publication 590.  

Secondary/joint owners of bonds and CD’s set aside for retirement.

Most issuers of bonds and CD’s allow you to designate a secondary or joint owner of those financial instruments.  This is true for I-Bonds, for example.  If you have some of these assets in your retirement nest egg, you should review those designations to make sure they reflect your current family status.   Generally, there is no need to obtain the consent of any existing beneficiary to make these changes.

I like to review the beneficiary status for our retirement plans each year when I am working on our income tax returns.  This is a convenient reminder for me.  Perhaps that would make sense for you as well.

Image credit:  Kriss Szkurlatowski

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