Making plans to ease your loved ones’ transition after you pass can help secure their future and protect their financial interests after your passing. This is particularly applicable when it comes to workplace retirement accounts governed by ERISA such as your 401(k) and pension plans; when choosing beneficiaries you must also keep in mind not only federal law but also your employer-sponsored retirement plans rules and your wishes as an individual.
ERISA protects employee-sponsored retirement plan assets by mandating that any individual who oversees or has discretion over managing a plan’s assets or provides investment advice to one for compensation follow fiduciary duties; this includes plan administrators, trustees, and members of an investment committee.
ERISA defines “participants” to include current and former employees eligible to benefit under an ERISA-governed plan, while “beneficiaries” refers to anyone named by either participant or plan terms as receiving benefits under its provisions.
ERISA specifies that, upon your death, your spouse should receive 50 percent of any account balance held within your 401(k), profit sharing plan or defined benefit/pension plan. To change this designation without incurring legal consequences for doing so, both parties must sign a waiver to do so; otherwise their spouse could challenge it in court.
However, in an IRA where a client named her children as beneficiaries, Michigan property law designated that their mother as legal heir and she was therefore entitled to claim all the IRA balance at once resulting in a significant taxable distribution requiring payment of income taxes.
Review your beneficiary designations regularly, particularly after experiencing significant life changes such as divorce or remarriage, to ensure that they reflect your new relationship. Otherwise, your ex-spouse could receive benefits.
To reduce any disputes after your death, it’s wise to review the specific guidelines of your workplace retirement plan and consult with legal and HR departments regarding compliance with company policy and ERISA regulations. Be sure to document all decisions clearly. Assuming you know exactly how you want your estate handled and beneficiary distributions handled will eliminate confusion later on. If unsure, seek assistance from an experienced attorney. Unknowingly navigating the complex rules of ERISA without professional guidance could result in costly litigation that ultimately burdens your beneficiaries. Furthermore, litigation places an additional financial strain on plan administrators–burdens which ultimately pass to their beneficiaries.