Voluntary Contributions

[luissaha]

A defined benefit plan provides for voluntary, after-tax contributions. The plan allows those contributions, plus credited interest, to be withdrawn in a lump sum at retirement, or to be annuitized and added to the monthly benefit otherwise payable under the plan.

A participant who made significant voluntary contributions and elected to annuitize those amounts (in the form of a single life annuity) died shortly after retirement. The participant's children are inquiring as to payment of a "survivor benefit" relative to the portion of the voluntary contributions that have not been paid out due to death. To illustrate, the participant's voluntary contribution account, with interest, totaled $100,000 at retirement. This increased the monthly retirement benefit by $500/month. The participant received only $10,000 worth of monthly benefits attributable to the voluntary contributions. The children are claiming they should be paid $90,000.

Is there any guidance out there on this? Any help would be appreciated.

[Lou S.]

What does the plan say about voluntary annuitized benefits at death?

[luissaha]

I should have included this in the original post. The plan does not address the issue directly. All it says it that voluntary contributions shall be distributed according to the form of benefit selected at retirement. I interpreted this to mean that if you chose to annuitize the voluntary contributions and receive them in the form of a single life annuity, there would be no benefits payable after death. I am concerned, however, because the plan would not be paying the total amount of the voluntary contributions to the participant. Is there some IRC requirement I might be missing that mandates the total amount of these contributions be paid, even though the participant elected to annuitize them?

[david rigby]

How is interest determined? If it's a fixed rate, this might be a cash balance benefit.

If it's based on market earnings (like a DC plan), then it might be a DC plan (notwithstanding its placement within a DB document).

[Lou S.]

I have no direct experience with them, but I will say from what little I have read, government plans that offer this option seem to have a death benefit payment equal to the un-recouped voluntary contributions to the beneficiaries. But I honestly don't know the mechanics of how it works.

Though I am surprised this is not addressed in the plan document one way or the other.

Is there anything in the SPD that beneficiaries might be relying on?

[luissaha]

Interest is based on market earnings, apparently. No, there is nothing in the plan document or SPD that mentions death benefits for the voluntary contribution account. I think they are relying on language that says participants are always 100% vested in their voluntary contributions. How can one be 100% vested and not receive 100% of contributions and interest? It's an interesting argument. I just can't find any authority that the plan has to pay out all of the voluntary contributions plus interest after the account is annuitized,

[My 2 cents]

Does the plan permit the participant to elect a higher monthly income in return for the elimination of the possibility of a death benefit? Were the election materials provided to the participant clear in specifying that the choice of a single life annuity would effectively trade any possible death benefits for a higher level of monthly income? Surely there is nothing in the law that would prevent such an election from being made with respect to annuitizing voluntary contributions.

In the opinion of this non-lawyer, if the election materials are clear and the participant did, in fact, elect a true single life annuity, the plan should deny the claim made by the participant's children and provide a copy of the election materials as a reason for the denial. The annuitization election should not operate as a "heads I win, tails you lose" proposition.

Surely, the plan administrator has no fiduciary duty to protect the interests of potential beneficiaries from poor decisions by the plan participants, especially non-spouse beneficiaries, and so long as the election materials would have made it clear to the participant that nothing would be payable after his or her death, there could be no reasonable finding of a fiduciary violation in permitting the participant to make such an election.