401(k) Beneficiary Designations: Small Forms, Big Consequences

Most employees fill out a 401(k) beneficiary form once, on their first day, and never think about it again. Years later, after a marriage, a divorce, children, or a death in the family, that form may name the wrong person, or no one at all.

For many families, a 401(k) is one of the largest assets they own. The beneficiary form decides where it goes. Plan sponsors cannot make those decisions for employees, but they can make it much easier to get them right.

Why the form controls

A 401(k) account does not pass through a will. It goes to the beneficiary named under the plan's rules, and ERISA generally requires the plan administrator to follow the plan documents.

Two U.S. Supreme Court cases show how strictly that works:

• In Egelhoff v. Egelhoff (2001), the Court held that ERISA overrode a state law that would have automatically removed an ex-spouse as beneficiary after a divorce.
• In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009), the Court held that the plan properly paid an ex-spouse named on the beneficiary form, even though she had waived her interest in the divorce decree.

The lesson for employees is simple: if you want someone else to receive your account, update the form with the plan.

Spousal rights in a 401(k)

Most 401(k) plans are designed so they are not required to offer annuity payments. In exchange, federal law gives a participant's spouse a strong default right: the spouse is entitled to the full account at death unless the spouse consents in writing to a different beneficiary. That consent must be witnessed by a notary or a plan representative.

A few details catch people off guard:

• Marriage changes the default. If a participant named a parent or sibling while single and later marries, the new spouse generally becomes entitled to the account unless the spouse signs a new consent.
• Prenuptial agreements generally do not work. A waiver signed before the wedding is not a valid spousal consent, because the person signing was not yet a spouse.
• Some plans have stricter rules. Plans that include money purchase pension assets or certain transferred balances may need to follow annuity rules for part of the account. Your plan document controls.

Common mistakes

• No form on file. The plan's default order applies, which may not match what the employee wanted.
• An ex-spouse still listed. As the Supreme Court cases show, a divorce decree alone may not fix this.
• Naming the estate. This can send the account through probate and may limit how beneficiaries can take distributions.
• Naming minor children directly. A child cannot manage an inherited account, which may require a court-appointed guardian or custodian.
• No contingent beneficiary. If the primary beneficiary dies first, the account may fall to the plan's default rules.
• Forms lost in a conversion. Beneficiary data does not always transfer cleanly when a plan changes recordkeepers.

What beneficiaries face after inheriting

The SECURE Act of 2019 changed the rules for many beneficiaries. Most non-spouse beneficiaries must empty an inherited account within 10 years of the participant's death, and in some cases annual distributions are also required during that period.

Certain eligible designated beneficiaries have more flexible options. They include a surviving spouse, the participant's minor child until age 21, a disabled or chronically ill individual, and a beneficiary not more than 10 years younger than the participant. These rules affect taxes for the people employees care about, which makes the choice of beneficiary even more important.

What plan sponsors can do

Employees own their beneficiary decisions, but sponsors can help:

• Offer online designations through the recordkeeper so employees can review and update them easily.
• Send an annual reminder, perhaps alongside benefits open enrollment.
• Prompt reviews after life events such as marriage, divorce, or the birth of a child when HR learns of them.
• Check data during recordkeeper changes to confirm beneficiary designations carried over.
• Make the spousal consent process clear, including how notarization or plan representative witnessing works.
• Coordinate with qualified domestic relations orders so divorce-related orders are processed correctly.

Coordinate with estate planning

A beneficiary form should fit with the rest of an employee's estate plan, including any trusts. Encourage employees to review designations with their estate attorney or financial planner, especially if they want to name a trust or have a blended family. A trust can help when beneficiaries are young or need protection, but it should be drafted with retirement account rules in mind, or it may limit how long distributions can be spread out.

Want to help employees keep their beneficiary information current? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm works with business owners on participant education and plan operations. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

Does a will override a 401(k) beneficiary form?

Generally, no. The plan pays according to its own documents and the beneficiary designation on file, not the participant's will.

If an employee divorces, is the ex-spouse automatically removed?

Not necessarily. Because ERISA can override state laws that would remove an ex-spouse, the employee should file a new beneficiary form after a divorce.

What happens if an employee never names a beneficiary?

The plan document's default order applies. It often starts with the surviving spouse, then may move to children or the participant's estate, but the order varies by plan.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.