COVID-19 has led to employee layoffs, employee health issues and changed rules for required minimum distributions (RMDs), all of which make it increasingly important for plan sponsors to have good procedures in place for maintaining updated beneficiary designations and finding missing participants.
According to a blog from The Rosenbaum Law Firm, emails bouncing back, mail being returned, little to no recent activity on the internet or phone, or a major distribution check not being cashed are all signs of a missing participant. Along with sending notices via mail, checking records and sending inquiries to the beneficiaries of a missing participant, the Department of Labor (DOL) has said plan sponsors can locate missing participants and beneficiaries through commercial locator services, credit reporting agencies and internet search tools.
Failure to begin making RMDs is an area that concerns both the DOL and the IRS—with both agencies actively looking at this issue during investigations and audits. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, workers must begin RMDs by April 1 in the year after they reach age 72. However, the Coronavirus Aid, Relief and Economic Security (CARES) Act has since allowed for 2020 RMDs to be waived for defined contribution (DC) plans and individual retirement accounts (IRAs).
These complex changes show the significance of proper communication strategies. “Knowledge is of the upmost importance, and so is communication,” says Andrew Oringer, co-chair of the ERISA and Executive Compensation group at Dechert LLP. “It’s important that everyone has a working understanding of the way [missing participant procedures] are being done, that all the parties share that same understanding and that it’s actually memorialized.”
Plan fiduciaries are also responsible for keeping beneficiary designations up to date and conducting proper beneficiary reviews, says Anne Tyler Hall, founding ERISA [Employee Retirement Income Security Act] attorney at Hall Benefits Law. Plan sponsors should be actively ensuring their participants are updating beneficiary forms and designations on an annual basis and maintaining these forms on file, she adds. If sponsors are bringing in a third party to perform beneficiary reviews, whether it be a consulting firm or a recordkeeper, the sponsors have a fiduciary responsibility for selecting and monitoring the third party.
“There needs to be a paradigm for evaluating the recordkeeper and evaluating their process,” Hall explains. “You can delegate fiduciary responsibility to third parties, but it’s a little misleading because, at the end of the day, the plan sponsor is still responsible from a fiduciary perspective for choosing the service provider.”
For plan sponsors that are hesitant about designating a provider, Hall suggests seeking ERISA counsel to build out a standard process in recruiting third parties and monitoring plan documents.
Hall says the most common event during which beneficiary designations don’t get updated is divorce. She says her firm is seeing an uptick in divorces and separations during the COVID-19 pandemic, so getting these designations is important.
Oringer says plan sponsors should be aware of other documents that can end up superseding a beneficiary designation. For example, qualified domestic relations orders (QDROs) provide a path for divorced employees to allocate assets to an “alternate payee” and can even override the preceding designation. Even divorce decrees can qualify as QDROs. While these may prevail over a beneficiary designation, a court challenge to the designation on file could result in legal fees. “It’ll turn out that the person never changed the beneficiary designation and there can be all sorts of unfortunate surprises,” Oringer says.
Hall notes that the onus is just as much on employees as it is on plan sponsors to keep their beneficiaries updated. Sponsors, providers and third parties should communicate with participants about their beneficiary designations yearly, but employees are the ones who must take action. “It’s a two-fold responsibility, but plan sponsors and providers can make participants aware of this,” she says. It’s up to plan participants “to make sure that the retirement account and their other assets are going to their families or loved ones.”
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