Why is a 401k Beneficiary Form So Important?

Many people are surprised to learn that a retirement account beneficiary form supersedes what is stated in their last will and testament. In some cases, this can result in retirement savings going to the wrong person.

The following frequently asked questions about beneficiary forms are worth reviewing to determine if your information should be updated.

Q: What is a beneficiary form?

A beneficiary form directs how a deceased participant’s retirement account assets are to be distributed upon the death of the participant. Completing beneficiary forms accurately helps avoid problems when a participant dies.

Q: When should the form be completed?

A beneficiary form should be completed at the time of your enrollment in the plan. You should review it regularly and update or correct it if any changes need to be made.

Q: What are some of the common errors or items not completed on a beneficiary form?

A participant might not list a contingent or secondary beneficiary. This would be the person to receive the account in the event the first named person does not survive you. It is always good to at least name a secondary beneficiary (and even a third) just in case the primary beneficiary predeceases the participant. Otherwise, the account will usually default to your estate and pass by the terms of your last will and testament or per the probate law of your respective state.

Q: What should participants do to maintain current beneficiary forms?

Employees should review their beneficiary designations annually to assure accuracy. Also be sure to update beneficiary designations after life events, such as marriage, divorce or death that may affect who your beneficiary is or your intentions for who you want it to be. A common problem is not removing a former spouse as the named beneficiary following a divorce.

Q: What happens if a participant dies and didn’t complete a beneficiary form?

In the absence of a beneficiary form, the plan document dictates how the account is to be distributed. Most plan documents require the deceased participant’s surviving spouse to receive the account. If there isn’t a spouse, then any children usually share the account in equal shares, or the distribution will be made to the decedent’s estate and pass according to the state probate law of their respective state.

Protecting families through company retirement plans makes sense, but participants must make sure the designations they make are documented correctly and updated to reflect their true intentions and wishes. Contact a legal or tax advisor with any questions you may have about naming retirement plan beneficiaries.