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Liability for Accepting Invalid Beneficiary Form?


kmhaab
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What liability does a plan sponsor have for accepting an invalid beneficiary designation form?

401(k) participant submitted a beneficiary form in 2018 naming wife and 3 children as equal beneficiaries (25% each). Participant signed his own name on the line for the spouse's signature for the spousal waiver. It is possible he had POA for the wife at that time, but that is not noted on the form and the plan administrator has no record of a POA. There was no witness signature. Form was accepted by plan sponsor. Participant died in January.

My opinion is this was not a valid spousal waiver and therefore the spouse is his beneficiary. One of the children is threatening a breach of fiduciary duty claim against plan sponsor for "recognizing the propriety" of the beneficiary designation form and leading participant to believe it had been properly submitted and was accepted.

Does plan sponsor have any liability here? 

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28 minutes ago, kmhaab said:

My opinion is this was not a valid spousal waiver and therefore the spouse is his beneficiary.

Agreed - plan is bound to follow the law and the terms of document. This was not, based on what has been received, a valid waiver. I don't think sponsor "accepting" the form means anything, as it was likely a "thanks, we'll put it in your file" w/o any further scrutiny. 

Is it the PA's responsibility to ensure participant beneficiary elections are complete, accurate and valid? I don't know, maybe they should ask their attorney. But I would pay the spouse and risk 25% liability from child than pay four ways and be on the hook for the 75% not paid to the spouse.

 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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What do BenefitsLink people think about using a warning something like this:

That this form was received and processed does not mean the plan’s administrator or anyone approved a beneficiary designation.  These forms are recorded with no review.  If you did not meet your plan’s requirements and conditions to make a valid beneficiary designation (or your designation, valid when made, becomes invalid), your plan’s administrator will follow the plan’s provisions ignoring your attempted designation.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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25 minutes ago, Peter Gulia said:

That this form was received and processed does not mean the plan’s administrator or anyone approved a beneficiary designation.  These forms are recorded with no review.  If you did not meet your plan’s requirements and conditions to make a valid beneficiary designation (or your designation, valid when made, becomes invalid), your plan’s administrator will follow the plan’s provisions ignoring your attempted designation.

Thanks for trying to help Peter, but I'm skeptical, especially about the "no review" part.  There is a corollary example: acceptance of a J&S waiver.  Suppose the J&S form and/or beneficiary waiver form form is returned with spouse signature.  Since the ER is unlikely to have any knowledge about that particular handwriting, ERISA created the requirement for a witness.  If this form has no witness signature (or the employee brings in the form and asks the HR rep to signoff on the already signed form), the ER must (IMHO) reject the form entirely.  Of course, it can be true the ER representative who accepts the form might have no knowledge about the details, so somewhere up the line the form must be reviewed, which can give rise to a rejection of the submitted form.  If such review is not immediate, the Plan is bound (as stated above by CuseFan) to follow the plan document and the law.

The original question is about liability, which sounds like something a court might decide, so I'll decline an opinion on that part of the question, except to say "maybe".  In my view, the ER is always "on the hook" to review the form before anything is paid. 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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David Rigby, thank you for your further thinking and smart observations.

A plan’s administrator (or whichever fiduciary has authority to decide a claim for a benefit after the participant’s death) must consider whatever is relevant in deciding the claims, including consider what effect an attempted beneficiary designation has under the plan’s provisions.

Based on my experiences, there might be tens, and perhaps hundreds, of thousands of plans for which no plan fiduciary checks a beneficiary designation until after the participant’s death.  And unless a plan’s governing document imposes an obligation or responsibility beyond those ERISA’s title I would require if the documents provide no more than ERISA § 205 requires, it’s not obvious that a plan’s administrator must evaluate the effect of what a participant wrote or omitted until doing so is necessary to decide a claim.

Were a plan’s administrator defending an actual or threatened ERISA fiduciary-breach action of the kind kmhaab describes, the administrator might like having in the evidence or complaint a warning of the kind I suggest.  That way, even if the litigant has standing to pursue the participant’s rights, one could show a Federal judge (or, even better, persuade a would-be plaintiff’s attorney about what the judge would find) that the participant could not have reasonably believed that the plan’s administrator had approved the attempted beneficiary designation as proper.

I recognize, however, that some, perhaps many, might perceive the warning as indecently hard.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I don't think the Plan Administrator has any liability in this case, unless the plan's procedures include review of submitted forms for validity along with formally notifying the participant that the form has been reviewed and found to be valid. Of course, I am assuming that the beneficiary designation itself, or the accompanying instructions, if any, specifically state(s) that in the absence of a valid spousal waiver the death benefit is paid pursuant to the plan's terms.  I just checked my beneficiary designations and I think it does an adequate job by:

1) Including language something like the following -

Your spouse will be paid the spousal death benefit as specified in the plan, unless you waive the spousal death benefit by completing this Form, and, your spouse voluntarily consents to both your waiver and to your designated beneficiary(ies) by completing the spousal consent section of this form. Without such waiver and consent, the spousal death benefit must be paid directly to your spouse.

2) Including in the relevant section a requirement for spousal signature and the signature line being clearly marked as asking for the signature of the spouse.

I don't believe it is standard of care in the industry to perform a detailed review of beneficiary designation forms until a death benefit is payable.
 

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You have bad facts here. When the participant signs his own name for the spouse, I can see a court accepting a breach of ERISA fiduciary duty argument under the exclusive purpose or prudence rule:  A prudent fiduciary in the same situation as this plan administrator would have investigated (or rejected outright) a beneficiary designation when a participant signs for the spouse and there is no POA on file. Also, as a matter of equity, a court could easily shift the legal risk to the plan administrator (they were the ones in the best position to prevent this harm) and should be held accountable.   

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The plaintiff's claim seems weak, but you never know how a court will rule.  Assuming the account hasn't been paid yet, the plan administrator should consider filing an interpleader action with the court.  An interpleader is used when somebody who has property to which two or more people have competing claims.  The person with the property turns the property over to the court for the court to decide who should receive it.  

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On 1/29/2021 at 11:37 AM, kmhaab said:

One of the children is threatening a breach of fiduciary duty claim against plan sponsor for "recognizing the propriety" of the beneficiary designation form and leading participant to believe it had been properly submitted and was accepted.

Generally, fiduciary duty runs to the plan and its participants, and on the facts as presented, the kids seem neither. And ERISA preempts any attempted non-ERISA claims. Treating the description as a hypothetical, of course.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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We take the position that a bene form is of no value until it becomes operative (i.e. when the participant dies.)  It is then, and only then that anyone reviews the document - and anything that happened before that is of no consequence.  Not saying someone doesn't take a glance at it and help the participant on occasion, but not as a fiduciary to the plan or the participant.  Too many possible intervening issues that can render a bene designation invalid (death of a bene, divorce, law change, plan change, etc.)  We recently had TWO bene forms that names their "fiancé" as a bene (by specific name).  In one case, they got married, then divorced, then the participant dies.  Divorce intervened and the bene naming the "fiancé" is invalid.  In the other case, they never married, split up (up a decade ago) and the kids (from a prior marriage) are questioning why the ex-fiancé is getting 25%.  Sorry.  No intervening event, and we think the bene form is valid.

Long story short - not a good idea to police something not necessarily operative - BUT, not a breach of a fiduciary duty (to whom? - the bene's were only contingent (speculative) recipients of plan assets).  When in doubt, interplead the money to the court and let them sort it out.

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The following is from an 8th circuit decision and a link to the full case is below. While the underlined sentence isn't directly on point to your issue because it wasn't addressing whether there was a breach of fiduciary duty, it does point out the "receipt vs. acceptance" distinction. The plan only required "receipt" and thus a beneficiary designation might be given effect even though it wasn't completed in its entirety. Here they did review it upon receipt and asked for more information, but they didn't state that the designation was invalid without the additional information. No telling what would have happened if the plan required "acceptance." Presumably it would mean that a review of the designation must be performed once it has been received (rather than waiting until death) and I could see an argument that there's a fiduciary duty to do let a participant know if the designation has any defects.   

 

Next, Alliant's interpretation is consistent with the Plan's clear language. The Plan provides that beneficiary designations are effective when executed by the participant and received by the Plan, so long as the Plan receives the designation within the participant's lifetime. The Administrator's determination to give effect to James's 2002 designation is consistent with these requirements. Similarly, the Summary Plan Description instructs participants that they can change their beneficiaries "by completing a new Beneficiary Designation Form and sending it to" Fidelity. The only requirement that the Summary Plan Description notes is that "for a Beneficiary Designation Form to be effective, [Fidelity] must receive it while you are still living." Giving effect to the form does not contradict the Plan's plain language, which requires only that the form be "received," not accepted. Consistent with these terms, when Fidelity returned the form to James with instructions to provide the missing relationship information, its letter did not indicate that his beneficiary designation was invalid; the "NIGO" (not in good order) notation is in a small box marked "Internal Use Only." See Harpole v. Entergy Ark., Inc., 197 F.Supp.2d 1152, 1158 (E.D.Ark.2002) (finding the administrator's decision to enforce a beneficiary designation with the beneficiary's social security number missing was "perfectly prudent and reasonable" and not contrary to plan's clear language where notification to participant did not  indicate that the form was "completely ineffective until the data was received" and plan documents did not require the beneficiary's social security number).

https://casetext.com/case/alliant-techsystems-inc-v-marks#4c2882df-7449-4515-a2b2-8d6740556102-fn2

 

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Everyone concurs that a plan’s administrator must carefully check everything when (after the participant’s death) there is a claim to decide.

kmhaab’s originating post describes a threat that someone might assert it was a fiduciary-responsibility breach for the plan’s administrator to receive a beneficiary designation without warning its maker that the designation would be ineffective to the extent that it attempts to provide benefits to a beneficiary other than the participant’s surviving spouse without the consent of the person who is, on the participant’s death, his then surviving spouse.

Such a failure-to-warn fiduciary-breach claim is not about how to decide to whom the plan provides a death benefit.  Rather, it is about whether the administrator breached a fiduciary responsibility in its administration of the plan, and, if so, what equitable relief (if any) might remedy the breach.  (The harm that might result from the administrator’s failure to warn is the participant’s loss of his opportunity to make a beneficiary designation his spouse consents to.)

We can imagine, and Former Esq. describes, some ways a judge or arbitrator might find that a plan’s administrator ought to have protected a participant from an expectation that putting a designation in the plan’s records might have more effect than the plan provides.

The first of my posts describes an attempt, perhaps void (if the plan or ERISA requires the administrator to check beneficiary designations) or otherwise ineffective, to warn a participant against such an expectation.

About both those points, we don’t know what a particular Federal judge would decide on a particular case’s facts.

My experiences (some with a retirement-services provider for tens of thousands of plans with about 12 million participants, and more recently with big employers’ plans) are that many plans’ administrators do not check a beneficiary designation until (after the participant’s death) a claim (rather than an imagined assumption of facts) requires the administrator to decide the correct beneficiaries.

If that is a particular plan’s administrator’s practice, does it harm participants to tell them?  Even if a warning is void or ineffective to excuse an administrator from a responsibility it had, would having an opportunity to read the warning harm a participant?

I don’t suggest a warning is required or needed, only that it might help and should not hurt.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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2 hours ago, Peter Gulia said:

I don’t suggest a warning is required or needed, only that it might help and should not hurt.

I would be concerned about creating a precedent and standard. What if one were reviewed/warned but not the 99 others? Or 99 were reviewed/warned but not the 1 other?

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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That’s an important caution.  A plan’s administrator should not present a statement of the kind I describe unless the administrator’s uniform practice is not to look at beneficiary designations and the statement is factually true and not misleading.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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4 hours ago, Bill Presson said:

I would be concerned about creating a precedent and standard. What if one were reviewed/warned but not the 99 others? Or 99 were reviewed/warned but not the 1 other?

I concur, Bill - and further comment that in todays digital age, a lot of this is actually done on-line, via a service provider's website - which is NEVER checked by either the plan sponsor/fiduciaries or the (directed, ministerial - NON-FIDUCIARY) service provider (who shouldn't do so), until the claim is filed.  It really is an "unseen by human eyes" scenario that is pretty common these days.

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