ERISA Exposure for Issuing Beneficiary Form?

[pog]

We are a New York company. An unmarried employee and participant in our 401(k) plan retired three years ago, and maintained his participation in the plan and his existing beneficiary designation after retirement. A year after his retirement, we merged our 401(k) plan into another independently administered plan, and the retiree's account was transferred. The retiree continued his participation in the new plan and made no change to his beneficiary designation at the time of the merger. His account with that plan never received salary deferrals from us due to his retired status.

Shortly before the retiree's death, someone claiming to be the retiree contacted our HR department and asked for a blank beneficiary form for the new plan, which we sent to the e-mail address that the person provided. The retiree never had an e-mail address of record in our files. The blank form we sent was used to submit an executed beneficiary form to the administrator of the new plan. Three months later the retiree died.

Now the formerly designated beneficiary who lost the benefits because of the new form is claiming that the person who contacted us was an imposter and the e-mail address did not belong to the retired employee, and that the executed form submitted to the new plan was fraudulent (including a forged signature, etc.). The former beneficiary says it was unlawful for us to issue a blank beneficiary form under these circumstances, or to issue a form at all because we never had a direct connection to the retiree's account with the new plan through salary deferrals.

Do we have legal exposure to claims by the former beneficiary under ERISA or otherwise? Or are the former beneficiary's claims limited to the new plan for recovery of the benefits?

Thank you for any thoughts.

[mbozek]

Before you go any further do you know:

1. if the person who claims to be the former beneficiary is actually that person? Has the plan confirmed the caller's identity.

2. How do you know that the person who called to change the beneficiary designation was not the participant and that the signature is a forgery?

3. If your plan has E and O insurance for fiduciary matters under ERISA?

[pog]

Thanks for the reply.

The former beneficiary is corresponding with the plan administrator through legal counsel and his identity is confirmed. He has submitted evidence that the e-mail address used to obtain the beneficiary form, which was also put down for the retiree on the completed form, actually belongs to the new beneficiary's girlfriend. He says he recognizes the signature on the form to be forged and all the handwriting on the form to belong to the new beneficiary, who is a family member of the former beneficiary. The former beneficiary is confident an expert handwriting analysis would confirm this. I'm not sure about the E and O insurance.

[My 2 cents]

Is it not now standard practice, when any transaction occurs that does not come from the address on record, to send a confirming email or letter to the prior address?

Is it even possible that sending a blank form out could result in fiduciary liability? It was the new company that accepted it, apparently without question. How could the old company have any liability for sending out a blank beneficiary form?

The whole thing sounds like it might make for a good movie. Family member of the former beneficiary? New beneficiary's girlfriend? Forgery, handwriting experts? Has it been verified that the participant died of natural causes?

[pog]

Well it gets better. The new beneficiary's girlfriend sent the completed form back to us and not to the plan administrator or recordkeeper. After the participant died, the new beneficiary got the plan administrator to accept the form and put it into effect based on the record of this "attempted submission." Then the former beneficiary popped up, and is arguing the "attempted submission" was part of the conspiracy to make a record of the fraudulent form but avoid triggering a confirmation mailing before the participant's death.

[mbozek]

If in fact the signature on the beneficiary designation is a forgery then the GF and the new beneficiary can be charged with committing forgery. Old beneficiary's lawyer should contact the DA. Old beneficiary could sue the parties for embezzlement which may induce the 2 participants to return the funds they stole to lower their sentences, assuming they have not spent the $.

Plan could be liable for negligent administration.

[david rigby]

Has it been verified that the participant died of natural causes?

Now that has the makings of a TV movie!

[MoJo]

OK. I think people are overthinking this. Either the "new" beneficiary form is valid, or it is not. Simply sending out a blank beneficiary form is not a breach of any ERISA fiduciary obligation that I am aware of. Determining whether the returned form is a valid beneficiary designation IS a fiduciary function.

1) Who are the fiduciaries of the plan? They are the ones to make the determination.

2) What is the process for determining the validity of a beneficiary designation? Was it followed?

3) Has the money been distributed? If not, consider an "interpleader" of the funds with a court.

The problem here is that there are a LOT of allegations. I wouldn't advise any of my clients to accept as FACT any of the allegations of ANY of the parties. To do so invites litigation - and the truth is that ONLY litigation will determine with finality (from the plan's perspective) who is the legitimate beneficiary, and if the plan fiduciaries breached their duties (keeping in mind that the overriding "standard" to which they will be held is a "prudent expert" and even if the plan distributed benefits to a forger, that in and of itself does not mean that they breached their FIDUCIARY duties (although they may be liable to recover the funds from the fraudster). Typically, the plan and fiduciaries will become "passive" participants as the real dispute will be between the purported beneficiaries.

I'd tell the lawyer to file a lawsuit - and then respond by counterclaiming and filing a third party complaint against the "new" beneficiary and let the court sort it out.

Sorry - but any other solution will leave the plan and it's fiduciaries in limbo no matter what they do.

[pog]

Thank you. I believe there is a reluctance to interplead because the plan accepted the submission of the new form by the new beneficiary AFTER the participant's death, based on the record of an "attempted submission" to us before the participant's death by an unverified third party (regardless of whether that unverified third party is the new beneficiary's girlfriend or not). In addition to legal exposure for the plan, it just doesn't look good.

[MoJo]

Pog: I'm not sure the submission to the employer of the deceased participant (even if not the current plan sponsor) is something to fear - as it was acting as an agent of the plan on behalf of one who accrued an interest in the plan while employed by that entity (if I understand the facts correctly). The "date" of receipt by the actual plan or plan sponsor is less relevant than the date the form was actually signed - which is the participant's act of designating the beneficiary.

I agree it looks like there may have been some "sloppiness" in the process but that doesn't mean a breach occurred.

Does the plan still have the money or was a distribution made? If the plan has the money, interplead it and wash your hands of the matter. Let the court decide who gets it. If the plan doesn't have the money,well - no matter what happens, there is probably litigation in the plans future.

[pog]

Thanks MoJo. Due to the merger of our plan into the new plan after the participant had retired, the participant never "accrued an interest in the plan while employed" by us. We never touched his account with the new plan.

I believe the plan made partial distributions but still has the bulk of the money because they suspended when the old beneficiary got in touch.

There is also an issue of how the plan responded to the old beneficiary's attorney when he first contacted them. They did everything to avoid admitting that they accepted the new form from the new beneficiary after the participant's death. The old beneficiary's attorney says this deceptiveness about the circumstances of the submission is a fiduciary breach in and of itself.

[ESOP Guy]

I think most of this topic has been covered. However, I am having a hard time seeing how you (prog or whoever) is making the leap of accepting a form equals saying it is valid and nothing can change that fact.

Simple example: We receive distribution forms all the time. We mail out hundreds of them for some of our larger clients and they come back by the dozens in the first few days after the mailing. Does accepting the forms really mean we have accepted the from is valid? I have never seen it that way. We have in fact gone back and asked for additional information when it is signed by a power of attorney or something doesn't seem to be in proper order.

So you accepted the form. You had no reason to believe fraud had happened at the time. Now you do have reason to believe that and have changed how you are handling the issue. That seems prudent to me. Is it prudent expert? I am not 100% sure as I am not a lawyer that has seen all the case law on that topic but I just don't see how accepting the form equals you are now bound by that to the point the plan's sponsor and fiduciaries have can't change their behaviors as new information comes to light.