Administration July 31, 2019

The Importance of Getting Beneficiary Designations

Not having proper beneficiary designations on file can create a difficult situation for plan sponsors, and with the use of automatic enrollment, fewer participants are revealing their beneficiaries.
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Art by Marc Rosenthal

Picture this: A participant has worked in your company for two decades. He’s contributing to the organization’s defined contribution (DC) plan, utilizing a health savings account (HSA) to maximize health care funds for retirement, and consulting his financial adviser yearly to ensure his steady path towards retirement. Check. Check. Check.

While these components suggest an active and aware participant, plan sponsors and their employees will typically fall short of one key benefits task—naming a beneficiary. Naming an individual eligible to receive an employee’s benefits if he passes away is significant, as it protects an employee’s assets and reduces stress for loved ones, as well as the plan sponsor.

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“It is a specific step in the enrollment process when you’re joining your retirement plan to declare a beneficiary for the assets that you’ve saved, should something happen to you or when you pass away,” says Meghan Murphy, vice president at Fidelity Investments.

However, Murphy notes that over the last decade, the number of workers naming a beneficiary for their accounts has slightly declined, largely due to automatic enrollment. Participants who were auto-enrolled into their company’s plan may miss declaring a beneficiary, as they fail to enroll themselves into the plan. Due to the rise of auto-enrollment in recent years, Generation X and Millennial workers are notably ones who miss beneficiary elections, Murphy says.

“Overall, we have about a third of our recordkept population who don’t have a beneficiary on file, and there’s a lot of education and communication that’s taking place to try and change that,” Murphy adds.

Plan sponsors who auto-enroll their participants should ask workers to complete a separate beneficiary designation form. These forms will establish beneficiary names, the amount each beneficiary should receive and the relationship between a beneficiary and participant. The forms also ask for a beneficiary’s Social Security or taxpayer identification number.

Should a participant fail to name a beneficiary, it can place a toll on the already-difficult experience following an anticipated or unexpected death. Without a designated beneficiary on file, the process can become document-heavy and potentially filled with court visits. And just because a participant signed a will or prenuptial agreement, doesn’t mean those same beneficiaries will receive assets from benefit plans.  According to DWC 401(k) Investors, because estate planning documents including wills and prenups are subject to state laws and retirement planning documentation is a matter of certain federal laws, the above paperwork is essentially overlooked throughout this process.

“It can drastically increase the length of time it takes for their loved ones to receive those proceeds, following their death,” Murphy explains. “Whereas if you have a beneficiary on file, it’s a relatively easy process to transfer the money, especially in unexpected circumstances where it can only add to people’s stress during that time.”

In this case, DWC 401(k) Experts say plan documents will specify who plan sponsors can designate assets to, typically in the order of surviving spouse; children in equal shares; surviving parents in equal shares; and lastly, estates. Of course, this could have its own set of barriers, as a participant could have been going through a divorce, have step-children or an estranged child that would further add complications.

“Those designations are pretty strict once they’re set into place,” says Murphy. “So, if a participant is in the process of going through divorce or having a baby, [updating beneficiaries] should definitely be one of the things on his checklist.”

Of note, in 2015, a court ruled an employer’s retirement plan documents did not incorporate beneficiary designation forms in its language or appendices, so the forms did not govern the award of benefits.

If a beneficiary cannot be located or has passed away and the plan sponsor has not been contacted requesting beneficiary payments, a law shareholder process allows employers to locate a ‘next-in-line-kin’ to transfer assets to, according to Murphy. A plan sponsor would have to go through a court process at this point, and until a beneficiary is identified or elected, the deceased participant’s assets will remain invested in the plan. 

Experiences such as these are why adding an annual benefits enrollment period—allowing participants to check in every year and confirm overall balances, investments and beneficiary designations—is critical to both the plan sponsor and employee. It’s especially important for participants who forget to fill out a form or forget who their beneficiaries are.

“If participants are not sure who their beneficiary is, they can always check with their human resources [HR] department,” Murphy says. “Again, if a participant has been with an employer for a long time and has forgotten if they’ve even gone through this process, they’re better safe than sorry.”
Administration July 25, 2019

Preparing Employees for Retirement, a Global Comparison

Retirement plan sponsors and policymakers can gain ideas from countries with different methods for encouraging retirement security.
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Art by Ellen Surrey

In the United States, the average deferral rate is 8.6%.  American workers are saving for retirement, and they’re saving well, as reports show the mean 401(k) account balance has soared 466% in the last 10 years.

But how do these figures compare to other nations? Even as U.S. employees accumulate their savings mass, what takeaways can plan sponsors learn from studying savings politics in different parts of the world?

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The 2019 Aegon Retirement Readiness Survey, conducted with the Transamerica Center for Retirement Studies and Longevidade Mongeral Aegon, seeks to answer these questions. In the survey report, Aegon analysts rank employees’ reported levels of retirement readiness in markets around the world. Those who feel best prepared for retirement achieve higher numbers on a scale of 1 to 10.

While the United States ranked a medium index rate of 6.6, India earned the highest score out of the 15 countries studied, at 7.8. Brazil came in at 6.5, and China and the United Kingdom performed well at 6.2 each.

This type of confidence and savings approach in these countries isn’t solely caused by enhanced employer communications strategies or government impositions—it largely falls on each worker’s proactive approach towards their long-term savings.  

“Our research has shown that countries in which defined contribution [DC] plans are better established, for example India, the United States and the United Kingdom, tend to have a higher percentage of individuals who say that they always make sure they are saving for retirement,” says Dick Schiethart, external communications manager for Aegon.

Sixty-one percent of respondents in India are habitual savers, identified as those who have crafted a written retirement plan, are adding to their retirement savings, and are on track to meet their financial goals. Forty-six percent of respondents are habitual savers in the United Kingdom, 53% in the United States and 34% in Brazil.

“Habitual savers are better prepared for retirement across a range of measures compared to other groups of savers including: their awareness of the need to plan financially for retirement, having a written plan and feeling confident that they will have a comfortable retirement,” Schiethart adds.

Pensions and government savings

Aside from consistently adding to long-term financial savings, investors in these countries are generally required to participate in workplace savings plans by their respective governments, adding even more to their savings objectives.

While the United Kingdom obliges all employers to automatically enroll their workers into a retirement plan at a minimum contribution of 3%, India mandates pension plans for the country’s private sector of workers, separated into three channels: a life insurance plan, a defined benefit (DB) plan with employer and government contributions, and a DC plan with contributions from workers and plan sponsors, according to Aegon. Brazil, however, requires private-sector and self-funded employees to accrue savings via its social security system.

For India, the multifaceted retirement system results in an average income replacement ratio of 99%, according to a 2017 report by the Organization for Economic Co-operation and Development (OECD). Other countries with the highest income replacement ratios include Italy at 93% and Portugal at 95% of working wages, though it should be noted that these countries are experiencing far lower economic growth rates compared with India.

Key takeaways for employers

While Indian investors are greatly optimistic over their retirement savings and their relationship to advisers, Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, notes there are economic factors fueling this enthusiasm. In the Aegon report, she explains, most Indian workers are employed in urban areas of the country, where a booming economy currently exists.

“They are among the most optimistic when it comes to future generations, because they are enjoying so much economic growth,” she says. “That drives a lot of optimism, which is coupled with retirement savings habits.”

Even in already-developed nations, governments can learn and apply certain strategies implemented globally. Collinson previously told PLANADVISER, PLANSPONSOR’s sister publication, that the U.S. government can require employers to offer auto-enrollment in retirement plans, a move already established in the United Kingdom, and can continue efforts to implement retirement plan auto-portability.

Anne Lester, portfolio manager and head of retirement solutions at J.P. Morgan Asset Management, says countries can view how other nations provide help for retirement and emulate flavors from that. “Because the thing a plan sponsor cannot do is make an employee save, but they can provide a structure that encourages it,” she adds.

But even in developed, developing, and underdeveloped nations, all these countries face separate economic factors and hurdles. Collinson emphasizes the continuous growing need for retirement savings assistance around the world, especially for older workers as longevity rises and birth rates decline, which is turn adds a strain on social security systems.

“In each country we surveyed 100 retirees, and many are retiring sooner than planned either for health reasons or employment-related reasons,” she says. “It’s very concerning because around the world, countries are at a point where individuals are expected to self-fund a greater portion of their retirement income.”

Countries are seeing a rise in defined contribution (DC) plans, but plan sponsors throughout the globe must ask themselves if their workers can save enough over the course of their career with just one savings method, or if there is another tactic waiting to be applied.

“Employers play such an important role through the offering of benefits that make it easy to save,” adds Collinson. “This is a global challenge, and the extent that we can offer best practices across countries and find new ideas and innovation can really only help the situation.”

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