Do you really know who will inherit your 401(k)?
August 21, 2013
You may think you've made all the necessary arrangements to ensure that the money in your 401(k) or similar workplace retirement plan is divided according to your wishes after you're gone. For example, you may have prepared a will and designated beneficiaries for your savings, among other steps.
So, what could go wrong? Plenty.
Consider these scenarios:
- "Ann" was married at the time of her death, but her will indicated that all of her assets should go to her children. Nonetheless, her 401(k) plan's rules make her spouse—not her children—the rightful recipient.
- "Bob's" wife predeceased him, and his will says his assets should be divided evenly among his four children after Bob's death. However, Bob forgot to name his youngest child as a beneficiary for his 401(k), which means only the three oldest children are rightful recipients.
- "Charlie" was single, and he named his estate as the beneficiary of his 401(k) so that it would be divided based on directions in his will. Since his death, however, Charlie's 401(k) assets haven't been divided and are instead tied up in probate and subject to estate expenses and creditor claims.
If you're a registered vanguard.com user, it's easy to keep your account beneficiaries up to date.
Don't accidentally disinherit your loved ones
Misunderstandings about workplace plan rules and the function of beneficiary designations and wills can keep investors' assets from being transferred the way they intend. If the bulk of your financial assets are held in a 401(k), you may unintentionally disinherit family members by including them in your will—without specifically naming them as beneficiaries in your retirement plan.
"Participants may not know that the beneficiary designations on file for their retirement plan supersede their will," said Pam McIlmoyle of Vanguard Recordkeeping Services. "That allows a deceased participant's assets to be transferred directly to beneficiaries without going through probate—but all intended beneficiaries must be listed on the plan's beneficiary form."
If you assume that you don't need to update your 401(k) beneficiary designations because your will includes up-to-date instructions for dividing your property, think again. Failing to keep your retirement plan designations up to date may disrupt the transfer of your assets. Your plan's rules, for example, may require that a deceased participant's estate be the default beneficiary if the primary beneficiary dies first and no "contingent," or secondary, beneficiaries are on file.
"At the very least, participants should review and update their beneficiaries when they get married, have a baby, or experience other life-changing events," Ms. McIlmoyle said. "Participants also should ensure that the beneficiary designations for their retirement accounts don't conflict with directions in their will. For example, plan rules often require spouses to submit a notarized statement waiving their right to 401(k) assets even if a will indicates that their surviving children should receive those assets."
How Vanguard can help
If your retirement plan is invested with Vanguard—and if you're a registered vanguard.com user with an e-mail address on file—you can expect to receive an e-mail each year to remind you about keeping your designations current.
"Participants can easily make beneficiary designations and update them online at vanguard.com," Ms. McIlmoyle noted. "Online designations are date- and time-stamped, and a confirmation message appears when participants have successfully updated their beneficiaries."
Executors in the digital age
As more and more plan administrators move to reduce their use of paper, many are providing statements and other retirement account information online. That's why some estate planners now recommend that their clients choose a "digital executor" who has access to user names and passwords to view all relevant accounts online upon an investor's death.
However, advance planning like this raises concerns about fraud, and ever-evolving information security procedures could render it useless in the end.
"Vanguard shuts off online access to an account after receiving notification of a participant's death to protect the account," said Ms. McIlmoyle.
Vanguard also won't permit fund transfers from a deceased or incapacitated participant's account until identifying information is received from the plan sponsor.
"We must receive beneficiaries' names, Social Security numbers, and percentage allocations in writing," Ms. McIlmoyle said. "If a participant is reported to be incapacitated, the plan sponsor must determine who the authorized representative is and whether any additional documentation is needed, such as proof of guardianship."
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