Whose Money is it Anyway?

I recently spent a whole day in Salt Lake City discussing operational nuances and considerations with ERISA 403(b) plans that have more than one service provider. As this is the case with a large number of 403(b) plans, even those with a single current provider due to service provider contracts that require individual releases to transfer. Some always remain with a former provider.

I love the mountains, and the view from the conference room was awesome. I think kids today overuse that word, but to me, the mountains are truly awesome, and I was thrilled to be able to look out the window during our discussion. One item that took my attention away from the picturesque vista was a discussion around beneficiary designations. These could be truly problematic when there are multiple service providers involved. This is true for any plan with multiple providers, and not just ERISA plans.

Why the problems?

Typically, an ERISA plan is written with a procedure for beneficiary designation. The terms of the plan are supposed to govern. A typical plan provides that a participant designates a beneficiary for his/her plan balance. Any new beneficiary designation would override prior designations. There’s the rub.

Service providers often solicit beneficiary designations. This could cause a great deal of confusion if a participant designates different beneficiaries with different providers, and then these have to be reconciled to the terms of the plan. Technically speaking, for a plan that provides for a beneficiary designation covering the whole plan, with the latest one being valid, you are in a situation where one provider has the valid designation, and the others may have no knowledge that a different designation exists or should be applied. Also, what if the service provider’s form indicates the designation only applies to that provider’s contract? In either case, the provider may take the position that they will follow the designation on file, no matter that it conflicts with the terms of the plan.

Who’s entitled to the money upon a participant’s death?

Undoubtedly, these cases will be going to the courts to decide. The bigger question will be who’s liable for paying the wrong party and what will be the cost of that liability? Liability may fall on the plan sponsor.

This is something that plan sponsors and their financial professionals need to consider. One suggestion might be to write the plan document to have different beneficiary designations for different service providers. That may seem like a simple approach to the problem, but it introduces a host of other complications. For example, does each provider understand the terms of the plan for spouse’s rights, and are those rights properly accounted for? Is the communication to plan participants simple and clear? Who is monitoring to help ensure all provider contracts for participant accounts have beneficiary designations, and that they follow the plan rules? The more providers and contracts, the more difficult that monitoring can become.

A simpler option is to maintain a single beneficiary designation for the plan. A responsible party will ensure that such designation is made per the terms of the plan, and will ensure that all applicable service providers are given the most recent beneficiary designation. A third party administrator could be ideally suited to that role.

In any event, it is important that the plan do something to address the issue. Addressing all plan administrative processes and addressing the “what-ifs” is one of the best defenses against liability if and when something ultimately goes wrong.

 

In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

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Affiliation Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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