Beneficiary documentation case goes to high court

A case scheduled to be heard by the Supreme Court next month about the fate of an inherited 401(k) plan should serve as a wake-up call to advisers who neglect to update beneficiary documents, according to experts.

The case involves Kari Ellen Kennedy, daughter of William and Liv Kennedy, who is suing her mother because the latter is listed as the sole beneficiary of Mr. Kennedy’s account in Wilmington, Del.-based DuPont’s 401(k) plan. Although he divorced Liv Kennedy, he never changed that designation. Kari Kennedy claims in court documents that her mother waived her right to the account balance by the terms of the divorce decree.

This problem arises quite frequently, advisers said, because it is so hard to convince people to update their 401(k) beneficiary documents. In fact, advisers said, it’s much easier to get participants to update their asset allocations than to get them to update their beneficiary forms.

LIABILITY ISSUES

But advisers who work with high-net-worth clients have a responsibility to make sure that their clients fill out beneficiary paperwork, said Fred Reish, a lawyer and managing director at Reish Luftman Reicher & Cohen, a Los Angeles law firm.

“Advisers may have some liability,” he said. “It depends how much they bite off. It’s more of their role as a financial planner. If you’re helping someone put their finances in order for the long haul, a financial planner should be advising their client to revisit all of the beneficiary documents.”

Mr. Reish said that sophisticated advisers who work closely with their clients and have checklists about planning issues such as updating beneficiary documents shouldn’t have any problem.

But if advisers say that they are a full-service planner and don’t help their clients with these documents, they could be liable.

“If they’re going to advise on financial planning, then they’re expected to do a good job, and part of that good job is the beneficiary designation,” Mr. Reish said.

Advisers said they find that the majority of their new clients and 401(k) participants haven’t updated these documents. The majority of people go through many life changes, such as marriages, divorces and births of children and grandchildren, without updating the documents advisers said.

“It’s really an afterthought a lot of times,” said David Barth, an adviser with Dawson Cos. in Cleveland, which manages $450 million in assets. “People are so focused on investment returns and allocations that they forget about some of the housecleaning items.”

These documents simply get overlooked, said Chris Cummings, senior vice president of national 401(k) accounts at Great-West Retirement Services in Greenwood Village, Colo. He said in a review of more than 2 million retirement plan participants in its record-keeping system, the company found that only 2% made any beneficiary change in 2007.

At The Vanguard Group Inc. of Malvern, Pa., just 5% out of a little more than 3 million participants up-dated their beneficiary documents in 2007.

Some advisers said people should revisit their beneficiary documentation every year, while others said it might be necessary only every two years.

Meanwhile, other retirement record keepers, such as The Charles Schwab Corp., Fidelity Investments and T. Rowe Price Group Inc., did not have this data available.

Usually, less than 10% of clients have updated their beneficiaries, said James Cox, a managing partner at Harris Financial Group Inc. in Colonial Heights, Va., which manages more than $420 million in assets.

“If you don’t change your beneficiaries, a divorced spouse has a windfall in 10 years because you failed to update your beneficiary,” he said. “Another bad thing is if you leave money to a beneficiary who is deceased.”

Mr. Cox urges clients to look at these documents every two years and anytime a major life event happens.

But individuals should review these documents each year, according to Diane Pearson, a financial adviser with Legend Financial Advisors Inc. in Pittsburgh, which manages about $380 million in assets.

She said that about 20% of the 401(k) plan participants with whom she works make beneficiary changes each year, which she thinks is a high average for the industry.

“I don’t know that you’ll ever get everyone, but it should be 100%, especially if you go through life changes,” Ms. Pearson said.

She had a client who had been married to his second wife for 20 years and had a teenage daughter yet still had his ex-wife listed as the beneficiary.

The number of plan participants who update their beneficiary documents each year is only about 1%, said Christine Soscia, an adviser with InVest Financial Solutions for Business in Las Vegas, which manages $250 million in assets.

“Everyone should be aware of who their beneficiaries are, [yet] some people don’t even know,” she said. “Unfortunately, saying 1% review their beneficiary every year might be a bit generous.”

Under federal law, money in accounts without a beneficiary designation automatically goes to the spouse unless he or she signs a waiver form, said Chris Guanciale, an attorney and senior vice president of business development for PlanMember Securities Corp. of Carpinteria, Calif.

But anytime a divorce occurs and documents aren’t changed, the situation gets quite dicey, he said.

PlanMember Securities attempts to meet with employers annually to convince employees to update their beneficiary documents, but even then, employees often don’t fill out the forms, he said.

Mr. Guanciale said that just last year, a participant died unexpectedly, and the plan sponsor began to pay out the distribution, but the beneficiary was an ex-spouse.

In that case, the ex-spouse gave up his rights so that he could receive additional items he’d wanted that had to do with the divorce proceedings. But if the parties hadn’t been able to reach a deal, it would have resulted in legal disputes, Mr. Guanciale said.

E-mail Lisa Shidler at [email protected]

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