The Hazards of Beneficiary Designations

Plan documents should clearly explain how participants can designate a beneficiary

As anyone involved in the operation of a 401(k) or other individual account plan is painfully aware, a minor misstep by a participant can result in a major headache for the plan sponsor. This is particularly true in the area of beneficiary designations, where a plan sponsor can find its plan embroiled in litigation solely as a result of a participant’s action — or inaction. Two recent cases emphasize the need to pay close attention to the administration of beneficiary designations. 

In contrast to many ERISA court decisions, these cases are noteworthy more for the underlying facts than the legal conclusions. The fact that each of these situations culminated in litigation in federal court serves as a potent reminder of the risks inherent in making payments pursuant to beneficiary designations. In each of these cases a deceased participant’s children asserted a claim to benefits despite the existence of a prior beneficiary designation naming a different beneficiary. 

Case Number 1
In Robinson v. MeadWestvaco Corp. Savings and Employee Stock Ownership Plan for Salaried and Non-Bargaining Unit Employees, decided by the U.S. District Court for South Carolina, a participant filed a written beneficiary designation in 1998, naming his sister as his sole beneficiary. The plan subsequently switched to online beneficiary designations, but no electronic beneficiary designation by the participant was ever recorded. After the participant’s death, his children claimed that they were the beneficiaries of his account. 

The plan administrator reviewed the children’s claim, concluded that the 1998 beneficiary designation remained in force, and denied the claim. The participant’s children then sued in federal court to enforce their claim. They asserted that prior to his death, the participant obtained a password and visited the plan’s Web site with the intention of making a new beneficiary designation in favor of his children, but concluded, based on the language on the Web site, that no action on his part was necessary to designate them as his beneficiaries. 

The beneficiary designation page of the Web site contained the following statement: “Note: Beneficiary elections previously made on paper will no longer be valid. The elections made on this site or through the Benefits Resource Center will take precedence over all other previous beneficiary elections.” Other language on the Web site explained that if there was no beneficiary designation, a participant’s children were the beneficiaries of the account in equal shares. The children argued that the participant interpreted the first statement to mean that his prior beneficiary designation was no longer valid and no beneficiary designation was in place for his account. Based on this interpretation, they said, the participant believed that no further action on his part was required in order for his children to receive his account because it was covered by the rule governing distributions in the absence of a beneficiary designation. 

While the court upheld the plan administrator’s determination on summary judgment, its decision does not negate the time and expense entailed in defending the lawsuit. In this case, it seems likely that litigation could have been avoided if the plan administrator had fully explained to participants that any prior written beneficiary designation remained in effect until an affirmative electronic beneficiary designation was made. This explanation should have been included in the participant communication materials distributed as part of the transition to online administration and on the relevant pages of the Web site. 

Case Number 2
Giving effect to a change in beneficiary designations was addressed by the U.S. District Court for the Middle District of Alabama in Bush v. Teachers Insurance and Annuity Association of America. While Bush involved competing claims to benefits under a Teachers Insurance and Annuity Association of America and College Retirement Equity Fund (TIAA-CREF) tax sheltered annuity contract, the underlying facts could just as easily arise in connection with a 401(k) or profit sharing plan account. 

In Bush, the participant’s son exercised a power of attorney to remove his father’s wife as the named beneficiary under two TIAA-CREF contracts and substitute himself and his siblings in her place. The son executed the beneficiary change forms five days before his father’s death but did not mail the forms until several months later. The participant’s wife and his children both claimed the benefits under the contracts, and TIAA-CREF filed an interpleader suit asking the court to determine whether the change in beneficiary should be given effect. The court concluded that the son’s authority to execute a new beneficiary designation under the power of attorney terminated at the participant’s death. As a result, the new beneficiary designations were invalid because, under the terms of the contracts, they were not effective until they were received by TIAA-CREF which was a number of months after the participant’s death and the termination of the son’s authority under the power of attorney. The court ruled that the participant’s wife was entitled to the benefits under the original beneficiary designations. 

While this litigation may have been unavoidable, TIAA-CREF was able to minimize potential liability by delaying distribution until the court resolved the dispute between the competing beneficiaries. If it had simply distributed benefits pursuant to the revised beneficiary designation, the wife would likely have sued to enforce her claim as the original beneficiary. If such a suit was successful, TIAA-CREF presumably would have been ordered to make another distribution to the participant’s wife. It would then have to absorb the cost of the original distribution or attempt to recover the distribution amount from the participant’s children. 

Conclusion
These cases serve as an important reminder that managing the risks associated with beneficiary designations may be a matter of plan administration, not legal compliance. In Robinson, litigation might have been avoided if participant communications had clearly explained the need for a participant to make an affirmative election to change an existing beneficiary designation. In Bush, delaying the distribution until after the court’s decision allowed TIAA-CREF to protect itself from the possibility of having to pay the same benefit twice. 

When it comes to the benefits of a deceased participant, potential beneficiaries are not only quick to make a claim despite an existing beneficiary designation but are often willing to sue the plan to enforce that claim. A prudent plan sponsor or administrator will keep this in mind in processing and implementing participants’ beneficiary designations.