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The benefits of beneficiary reviews

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By Nicole Krempa

September 18, 2008 11:41 am ET

Your clients' retirement accounts are often their single largest non-real-estate asset.

Yet these assets can be at risk because about 80% of beneficiary forms on individual retirement accounts, defined benefit pension plans and insurance policies are either blank, outdated or not properly filled in.

Mistakes made when designating beneficiaries can be costly and even tragic because they impair the ability of your clients to protect, preserve and pass on assets to their heirs.

Fortunately, you can help eliminate this problem by integrating beneficiary reviews into your practice.

Conducting regular reviews can help you strengthen relationships with clients, develop relationships with beneficiaries, uncover potential rollovers, retain and consolidate assets, and generate more referrals.

Of course, discussing beneficiaries or other issues surrounding end-of-life planning can be uncomfortable for financial advisers and clients alike.

One way to get the conversation started and help your clients understand the value of your review is through sharing personal stories and professional experiences.

Ask your clients to think about the legacy they want to leave.

This can help facilitate the conversation.

Every client is different, and your approach should be tailored to your client's needs and expectations. When working with your top clients, you should already have a good sense of their family and financial situation, as well as the issues that resonate with them and strike an emotional chord, which sometimes is the best way to help clients comprehend the importance of their decisions.

Your role is to understand your client's wishes and articulate them in a manner that can address everyone's concerns and needs.

But since many clients shy away from such a discussion no matter when it is broached, it is important to take a soft approach by integrating the topic into client communications.

One opportunity to have the conversation is when life events take place that trigger the need to change beneficiary designations.

Another way to get the conversation started is to consider providing complimentary reviews of retirement accounts.

If you have clients whose children may be preparing to wed, for instance, your offer to sit down with them to review their accounts may be very well-received.

Hosting a family meeting or providing client seminars may be another venue for you to showcase your expertise and facilitate a conversation about preparing for unexpected events. A client seminar may focus on explaining how the beneficiary designation process works and what may happen if beneficiaries transfer accounts incorrectly.

Clients are unlikely to know, for instance, that when assets invested in IRAs are inherited through the estate, as much as 70% of the proceeds may be consumed by taxes upon death of the owner.

After explaining the facts, you can offer to manage the process so that your clients and their beneficiaries won't have to worry about the details.

The beneficiary review also can help you uncover potential rollover opportunities and hidden assets. Before the review, ask your clients to make sure that they have current copies of their completed beneficiary forms.

If they don't, ask them to bring in a copies of their account statements for all of their accounts, even the ones that you don't manage.

Explain that together, you will update all accounts to reflect the current and correct beneficiaries.

You also want to confirm that your client's information matches that which is on file with the account provider.

Forms sometimes get lost due to corporate reorganizations and systems changes, which could require beneficiaries to contact the custodian to find out who becomes the beneficiary under the custodian's default provision.

As a result, you need to make sure that every account provider has a signed form on file to avoid assets' being dispersed through the default provisions of the custodian.

Explain to your clients that some default provisions require assets to go to the account owner's estate, subjecting the assets to probate.

During the review process, confirm that the named beneficiaries, including contingent beneficiaries, are consistent with the client's estate-planning goals. Generally, you want clients to name a person as their beneficiary, not an entity, unless they are leaving their retirement assets in whole or in part to a charity or a trust.

Finally, confirm that all beneficial shares add up to 100% to avoid confusion once the assets are dispersed.

Nicole Krempa is program manager of educational initiatives at New York-based OppenheimerFunds Inc.

For other IN Retirement columns visit InvestmentNews Retirement Center.

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