Peter Gulia

Yes, the participant by her inattention failed to change her beneficiary designation. But observe that the Honeywell 401(k) Plan incurred $$$ in attorneys’ fees and related expenses for two layers of Federal courts’ proceedings, with briefings and arguments on several issues. (The plan incurred these expenses, even if the employer volunteered to advance or outright pay them.) Although the court found the plan’s administrator blameless, it’s unlikely the employer/administrator will recover from the participant’s personal representative or any litigant any portion of the expenses. If the expenses were or are charged against the plan’s assets, participants share, however indirectly, in the expenses.

pmacduff, thank you for your helpful observation. Some participants tolerate the constraint and adapt to it in a way you describe. But at least some are offended that a Procrustean computer system requires a participant to specify a difference (however slight in percentage and amount) that pushes one to express (however subtly) a difference the maker does not intend. That offense-taking can happen even when the participant knows the favored beneficiary will adjust the difference by giving money to the others. And even when there is no discord, many people care about the symbolism. Also, some plans’ sponsors and administrators care about this point for other purposes. One of them is decreasing the number of participants who made no (valid) beneficiary designation. Many participants don’t read carefully the beneficiary-designation form. Some miss or ignore the instruction about whole percentages. Some don’t respond to a notice, or even repeated notices, that an attempted beneficiary designation was not processed. (Without those failures, the court case described above would not have happened.) It’s not enough to observe that people should be more careful; human behavior has weaknesses. (I know I don’t diligently do everything I should.) And some fiduciaries seek to make things easier for participants. An absence of a participant-specified designation burdens the plan’s administration because it calls for interpreting and applying on particular facts (which take time and effort to get) the plan’s default beneficiary designation. What if the plan’s default is to pay the personal representative of the participant’s estate, but no executor or other representative was appointed (often because the individual had no probate assets)? Or what if the plan’s default, after confirming the absence of a surviving spouse, is the participant’s children? How does the retirement plan’s administrator know how many children the participant had? If no one submits a claim, must the administrator search for the children? Or if someone submits a claim and states the participant had two children, how does the administrator confirm that there are no more than two? Dealing with these and other default situations is work. The expenses of applying a plan’s default-beneficiary provision can be significant if an administrator or a service provider administers a plan or plans with hundreds or tens of thousands of participants. I’m hoping to discern a range of experiences from plans that use a range of service providers. Among them, how about: Fidelity, Empower, TIAA-CREF, Vanguard, Alight, Voya, Principal, Merrill Lynch/Bank of America, T. Rowe Price, . . . ? I’m guessing some have figured out ways to manage and adjust a whole-percentages constraint.

Bird, thanks for adding a name to our survey. Does anyone know what Fidelity does? A whole-percentages constraint, and how a service provider and the plan's administrator deal with it, matters because a parent with three children might be offended if she must specify one of them to get 34 rather than 33 percent. In my experience, many parents strive to avoid favoring any child over the others.

RatherBeGolfing, if you want the citations to the courts' decisions, just email me.

A recent court decision treated as proper an individual-account retirement plan’s provision, stated at least on the plan’s beneficiary-designation form, that: “The Allocation % [between or among a class of beneficiaries] must be whole percentages.” The participant submitted a form that asked for “33 1/3%” for each of her three siblings. The court found that—even if the plan’s administrator might have had discretion to accept the not-in-good-order designation (Honeywell argued it did not)—rejecting the participant’s attempted designation was no breach because a fiduciary administers a plan “in accordance with the documents and instruments governing the plan[.]” Gelschus v. Hogen, No. 21-3453, --- F.4th ---, 2022 WL 3712312 (8th Cir. Aug. 29, 2022) https://ecf.ca8.uscourts.gov/opndir/22/08/213453P.pdf How common is this whole-percentages provision? Do plans require a whole-percentages beneficiary designation because the plan’s sponsor or administrator seeks to fit within a recordkeeper’s or other service provider’s software and systems? If a participant specifies 33%, 33%, 33%, does an administrator reject the form as not adding up to 100% Or does an administrator accept a form that adds up to only 99% (or 96% for six beneficiaries)? If an administrator accepts a less-than-100% designation, does the plan or a plan-administration procedure provide an adjustment rule so the beneficiaries’ shares exhaust the whole of the participant’s account? BenefitsLink neighbors, how does this work in the real world?

And for those who find a carryover presumption must not be made, pointing out that using such a presumption might not be cost-efficient (if that's fitting in the particular situation) might help deflect or diminish a client's reaction that the law seems illogical.

Some practitioners might find one may—without tripping on an ERISA command or a tax-qualification condition—write a plan document and an automatic-contribution notice to provide that the most recent deferral election under one’s former employer’s plan is the beginning election, subject to revocation or change, under the new employer’s plan. (I’m not saying that’s my view.) Even for those who think the arrangement may be provided, the plan’s sponsor or administrator might consider practical concerns, including expenses. The cost-benefit analysis can vary with the surrounding facts and circumstances, including especially the number of newly eligible participants, the ease or difficulty of communications, and how much the new employer seeks the goodwill of the new employees. If the number of newly eligible participants is tens of thousands, the benefits of not needing to otherwise solicit and process fresh deferral elections and of providing a convenience to many new employees might outweigh expenses, including for some lawyering, of creating and administering the plan’s provision for a carryover deferral election. (Further, a company that frequently does acquisitions might design a framework that applies generally regarding all acquisitions and those new employees.) If the number of newly eligible participants is small, a cost-benefit analysis might cut in an opposite direction, making it simpler to get cash-or-deferred elections the way the employer/administrator ordinarily gets them for newly eligible participants not hired regarding an acquisition.

If your client has not engaged an attorney-at-law admitted to Puerto Rico practice, you might take up CuseFan's invitation to ask your and your client's questions to those in BPAS's special-focus practice for Puerto Rico.

david rigby, thank you for your point that one considers the source's qualities. And thank you for your vote of confidence. But I have no appetite to be a designer of a software tool of the kind I imagined. If the lead designer and specifier were Derrin Watson, would you buy the software tool?

Imagine a software publisher offers a tool to show the presence or absence of all potential IRC § 414(b)-(c)-(m)-(n)-(o) relationships (or a limited set of them as the user specifies). The software would allow a user to fill-in factual information, without needing to know the tax-law rules to be applied to that information. It would have context-sensitive definitions and guidance to help a user fill-in the needed factual information. The software package would generate a report a user may furnish to its client. The report would show the presence or absence of each § 414(b)-(c)-(m)-(n)-(o) relationship, with some explanation of why the relationship is present or absent. The report would include disclaimers and warnings to limit the user’s liability to its client. Each user could take that default text, edit it, add warnings, or replace the set with the user’s custom text. The report would speak in the TPA’s or other user’s voice, and could show the user’s name and logo, and specify the relationship manager or other contact. BenefitsLink neighbors, if a software tool like this were available (from a reputable and reliable software publisher, ideally one you already use), would you buy it?

Luke Bailey’s point is not about whom an ERISA-governed retirement plan pays, but rather about State-law remedies (not involving the retirement plan or its fiduciaries) the decedent’s estate or another potential taker might have against the plan’s distributee (who might have money or other property which equitably belongs to the estate or another potential taker). About a beneficiary who is not the participant’s surviving spouse (or under a plan that need not and does not provide that a participant’s surviving spouse is the participant’s beneficiary), some (but not all) courts in some circumstances find ERISA might not preempt a state court’s order—made after the ERISA plan has paid or delivered the plan’s benefit—that does not involve the plan or any fiduciary of it. All Federal courts recognize that ERISA preempts States’ laws at least until the plan’s disposition of the plan’s benefit is done. Decisions for the Third, Fourth, Sixth, Eighth, and Eleventh Circuits interpret ERISA as not always precluding a remedy that does not involve the plan or any fiduciary of it, and does not frustrate a surviving spouse’s right. On the other side of a circuit split, a Seventh Circuit decision interpreted ERISA to preempt such a constructive-trust remedy, even if the remedy would ask nothing of the plan or any plan fiduciary. (I express no view about which interpretation is better.) Some States’ court decisions recognize that those who would be takers under law or an agreement external to a retirement plan might have equitable remedies against a plan’s distributee. The situation that most frequently raises issues about whether equitable remedies against a plan’s distributee are available is a participant’s unrevoked beneficiary designation that names the participant’s former spouse. An estate’s personal representative might argue that the former spouse ought not to keep property that the divorce agreement allocated as not that former spouse’s property.

A provision of the kind BG5150 quoted is in the cycle 3 IRS-preapproved documents of a few of those big publishers. Perhaps some of them might see this discussion, recognize an ambiguity in the text, and internally file a reminder—for the next cycle—to write something to answer the question BG5150 asked.

Here’s the 1974 Act, as reprinted in 88 Statutes at Large 829-1035. https://www.govinfo.gov/content/pkg/STATUTE-88/pdf/STATUTE-88-Pg829.pdf And here’s a photograph from the September 2 (Labor Day) signing ceremony.

With my family and friends, we celebrate that source of my employment with an ice-cream cake, saying "Happy birthday, ERISA!"

About your second question: Among the exceptions to a retirement plan’s anti-alienation provision is the United States’ enforcement of a judgment imposing a fine or restitution regarding a crime. Beyond ERISA’s and the Internal Revenue Code’s provisions, the employer’s or plan administrator’s lawyer might consider these statutes: 18 U.S.C. §§ 3316, 3556, 3663, 3663A, 3664; 28 U.S.C. §§ 3001-3308. With increasing frequency and intensity, Federal prosecutors seek restitution for a victim, and do so in ways that enable invading the wrongdoer’s retirement plan benefits. For an illustration of one of those ways, see BenefitsLink’s recent news about Evan Greebel: https://benefitslink.com/news/index.cgi/view/20220824-173391 https://benefitslink.com/news/index.cgi/view/20220826-173452

While I provide no advice: That the plan’s text suggests a divorce “revoke[s] the Participant’s designation of the Spouse as a Beneficiary” could be interpreted to negate only the portion of the participant’s beneficiary designation that names the participant’s former spouse. If the participant is alive and not incapacitated, making a beneficiary designation now might remove doubts, perhaps including one or more doubts about whether the participant intends to benefit the former spouse.

Consider, too, that a divorce might have no effect on a beneficiary designation. If the plan is ERISA-governed, it’s all about what “the documents and instruments governing the plan” provide. Many documents omit or negate a provision for a divorce to affect a beneficiary designation.

AMDG, thank you for reminding us about the E-SIGN Act, now a 22-year-old. That law imposes some constraints on a Federal agency’s rulemaking powers and interpretation powers. But an act for which an agency calls for a “manual” or even ink-on-paper signature might not be a transaction that must not be denied legal effect because it was done using an electronic signature. And even when an agency acts beyond its powers, few retirement-plans or retirement-services practitioners want to take on the burdens of challenging the government. ****** Most of us like electronic signatures. Which are the acts for which EBSA or IRS asks us to slow down and scribble something that looks like an old-fashioned signature?

C.B. Zeller, thank you for the source about authorizing a service provider to submit a Form 5500 report. I regret I can’t add much help about an actuary’s signature on Schedule MB/SB. (I’m don’t know any rule, guidance, or practice for this. The defined-benefit pension plans I’ve advised about in recent years are governmental plans.) The instruction you quote is ambiguous. There might be several nonfrivolous interpretations. BenefitsLink neighbors, let’s keep filling out this list. Which acts: require an ink-on-paper signature? require a “manual” signature, but permit it to be delivered by electronic means? permit an electronic signature?

A BenefitsLink discussion yesterday remarked on a service provider’s request for a nonelectronic signature, despite an IRS procedure that permits an electronic signature. There is no one comprehensive rule that answers questions about the acts or circumstances that require a manual, rather than an electronic, signature. For some of us, it’s not easy to recall which acts (of those that call for a plan sponsor’s or plan administrator’s signature) permit an electronic, or require a “manual”, signature. So, let’s crowdsource our list. The focus is on what the three U.S. government agencies—the Treasury department’s Internal Revenue Service (IRS), the Labor department’s Employee Benefits Security Administration (EBSA), and the Pension Benefit Guaranty Corporation (PBGC)—say is permitted or required. If you quickly remember it, next to each description put the abbreviation for the agency that stated a rule or guidance. I’ll start by putting one entry in each category. Manual signature required A plan’s administrator authorizing its service provider to submit the administrator’s Form 5500 report — EBSA — source ??? . . . . . . . . . . . . Electronic signature permitted A user’s signature to adopt an IRS-preapproved plan document — IRS — Rev. Proc. 2017–41 § 5.10, 2017-29 I.R.B. 92, 99 (July 17, 2017), https://www.irs.gov/pub/irs-irbs/irb17-29.pdf . . . . . . . . . . . . We invite your BenefitsLink neighbors’ praise if you help us complete this list.

Kac1214, I’m glad my reading helps you. Considering the IRS’s statement in its Revenue Procedure, a request for a non-electronic signature might be about a particular service provider’s business practice rather than meeting a tax law condition.

MoJo, sorry if my observation was too subtle. Perhaps it’s only my imagination, but I’ve observed that some retirement-services providers find ways to streamline a process when doing so aids the provider’s efficiency, but seem slower to streamline a process when it’s about customers’ convenience. Likewise, some providers find ways to get a customer to bear some expense for an inefficiency the customer could help avoid, but are less swift in improving a process when a customer bears the costs of an inefficiency. My perceptions might be about some service providers less customer-friendly than the one you work for.

One wonders if the service provider’s customers’ participants are charged an incremental fee if a participant elects paper, rather than electronic, account statements.

EBECatty, thank you for your smart catch. It didn’t occur to me that a § 457(b) plan’s sponsor might have stated a plan’s required beginning date, required distribution period, or other minimum-distribution provision other than by reference to the Internal Revenue Code sections. Unless my client intends a provision more restrictive than what’s needed to get (or that allows less than what’s permitted within) eligible-plan tax treatment, I write some provisions of a § 457(b) plan using Code-sprinkling. For example, a document’s definition for “Required Beginning Date” might state it “Has the meaning given by IRC § 401(a)(9), including any special rules under those provisions.” Likewise, a provision about how much must be distributed to a participant or beneficiary might refer to § 401(a)(9) and § 457(d)(2).

Beyond Belgarath’s request for help about when to do a plan amendment: What tax-law change in SECURE requires or permits an amendment of a nongovernmental tax-exempt organization’s § 457(b) plan? As I read the December 2019 changes to Internal Revenue Code of 1986 § 457(d), all those changes refer to a plan maintained by a governmental employer. Does SECURE include other tax-law changes that could affect a nongovernmental tax-exempt organization’s § 457(b) plan?