Death benefit - No beneficiary

[401(k)athryn]

A participant dies at age 37.  He had no 401(k) Plan beneficiary form on file.  He has about $6,000 in his account.  In the absence of a beneficiary designation, the plan document states that the death benefit shall be payable to the Participant's spouse or, if there is no spouse, to the Participant's children in equal shares or, if there are no children to the Participant's estate.

The participant had no spouse and no children.  His parents also predeceased him.  There is a great aunt who has indicated that no one will be establishing an estate and no one will be claiming the retirement funds.  She had been advised that, as great aunt, she would not be entitled to the money.  Instead, it would go to the deceased participant's first cousins (of which there are 14), who either have no knowledge or no intention of creating an estate.

What should be done with the money if there is no estate or other beneficiary? 

 

[My 2 cents]

Not a lawyer, but...

Did the participant die penniless except for the 401(k) balance?  No property, usable clothing, a television set that worked?  The 401(k) plan has to pay the account out, and, apparently, by its terms, it has to pay it out to the estate.

Are you going to take the great aunt's word that the estate will not be probated (there is always an estate - that's why estates are the default beneficiary of last resort, so I think that what the great aunt means is that the estate would not be probabted)?

Is there some way to notify the 14 first cousins?  I for one cannot imagine that they would turn their noses up at $400+ each.  Perhaps some sort of expedited probate process would be worth while. 

[MoJo]

Most states have an "abbreviated" process for handling "small" estates - that usually don't involve anything more than filing the appropriate form with the probate court and then handling things without court supervision.  Some states go so far as allowing one to actually administer the small estate with NO filing with the probate court - upon presenting an affidavit on the appropriate form or with the appropriate language to whomever holds the assets.  We see these all the time and simply have to verify that it is on the right form/language.  Search for "small estate" and the state where the decedent lived to see what's required in that jurisdiction.

[jpod]

There are 14 first cousins, and no living siblings of the deceased parents?  Sounds highly unlikely.  Or, does the intestacy law of the state prefer cousins over siblings of deceased parents?  Also highly unlikely.

[david rigby]

3 hours ago, 401(k)athryn said:

She had been advised that, as great aunt, she would not be entitled to the money. 

Who says?  Maybe so.  See above advice.

 

[jpod]

She's probably right about that.  Usually (always?) intestacy priorities work their way down only from the decedent's grandparents, and she would be a sibling of a grandparent so therefore out of the chain. 

[Peter Gulia]

If the circumstances and the plan's provision are as 401(k)athryn describes:

(It isn't so that the participant/decedent has no estate, because the estate might have a claim to the retirement plan's death benefit.)

Doesn't the plan's administrator do nothing until there is a claim to respond to?

Doesn't the administrator deny a claim unless it is satisfied that the claimant is the duly appointed personal representative of the decedent's estate?

If the plan pays the personal representative, isn't the claim under the plan satisfied?

Isn't it the personal representative's duty to sort out who are the estate's distributees?

In my experience (which includes thousands of beneficiary claims), it's usually unwise for the plan to try to find a beneficiary and it's much safer to let a beneficiary find the plan.

[jpod]

Agree with FGC on all points.  Plus, sometimes the intestate heirs will ask to skip the probate process and just have the benefits paid to them directly.  This could become a big problem for the PA if, for example, another intestate heir pops up or there are creditors of the estate who would stand in line in front of the heirs.   

[MoJo]

1 hour ago, Fiduciary Guidance Counsel said:

In my experience (which includes thousands of beneficiary claims), it's usually unwise for the plan to try to find a beneficiary and it's much safer to let a beneficiary find the plan.

I disagree - I think the plan fiduciaries have a duty to try and resolve who has beneficial ownership of assets in the trust.  I think it would be unwise for the account to lie fallow - with no one managing it.  Absent direction from the participant or bene's, the plan sponsor HAS A FIDUCIARY RESPONSIBILITY to step in and actively manage the investments.  Hence, the reason they should try to find someone to take charge of the account.

We do it all the time on behalf of our client plan sponsors, and very actively do so with abandoned plans for that reason.

That's why we always try to find out the small estate process for the jurisdiction in question, and will even point the potential bene's to the "affidavit" or other forms they may need.  Indiana let's a bene to administer the assets WITHOUT a probate filing, for estates of less than $50,000.  Ohio lets you do it with a simply affidavit filing in probate court for estates less than $25,000 (may be higher now).

[Peter Gulia]

I do think a plan's fiduciaries have responsibilities concerning the investment of a participant's account until a beneficiary gets control.

I also think there are situations in which a plan's administrator might furnish to a claimant or someone who has expressed an interest in becoming a claimant information about how to become an estate's personal representative, including under a State's small-estate procedure.

 

[CuseFan]

Well, everyone has five years to figure it out before the balance must be distributed under the RMD rules!

[mstick]

Escheat the amount to the state the participant last resided in. Include a notice to that state's property division indicating the number of benes. Send notices that this has been done to those bene's that are known. Keep a record of what was done and why; and set this method as a last resort contingency process.

[david rigby]

8 minutes ago, mstick said:

Escheat the amount to the state the participant last resided in. Include a notice to that state's property division indicating the number of benes. Send notices that this has been done to those bene's that are known. Keep a record of what was done and why; and set this method as a last resort contingency process.

On what basis does a qualified plan do an escheat?

[ESOP Guy]

I 2nd the question on what basis do you do an escheat?  As a general rule it is my understanding ERISA and the DOL say no to the idea of an escheat ever. 

I would be far more comfortable if the 5 year time limit happens to treat this as a lost participant per the plan document.  If one of the heirs show up with a claim then restore the account balance per the plan document and make the payment per the plan document. 

I think that can be defended both legally and per the plan document. 

[MoJo]

1 hour ago, mstick said:

Escheat the amount to the state the participant last resided in. Include a notice to that state's property division indicating the number of benes. Send notices that this has been done to those bene's that are known. Keep a record of what was done and why; and set this method as a last resort contingency process.

Thirds....  A "prudent" fiduciary would only escheat AFTER all other reasonable steps had been taken, AND after the requisite amount of time with "no known" beneficiaries locatable.  Otherwise, it's an abuse of escheatment process and a possible fiduciary breach.

[My 2 cents]

If it is a defined benefit plan, the benefits, if not to be paid, are forfeited, serving to reduce future employer contributions.  If it is a defined contribution plan, the balance, if not to be paid, must be reallocated as forfeitures to the other participants.  This is a 401(k) plan per the original poster, so giving the money to everyone else would be the alternative to paying it to the first cousins.  It is not for the great-aunt to spurn the money.  One or more of the cousins should be contacted. In any event, as noted by others, nothing should ever be escheated to the state directly from plan assets.

[401(k)athryn]

Thanks everyone!  This has been helpful although not conclusive, which I did not expect it to be. 

This great aunt and the 3 cousins who have been contacted, do not want to be in charge of filling out any paperwork to establish the estate.  I do not want to spend time trying to determine beneficiaries of this deceased participant and neither does the plan sponsor.  I also do not feel that it is my responsibility to educate anyone on small estate rules. 

Does the plan sponsor have a responsibility to find beneficiaries or pass on small estate information? 

I really like ESOP Guy & My 2 Cent's posts (and possibly Fiduciary Guidance Counsel's post), which seem to suggest that the plan sponsor can do nothing with this account until someone claims the money and then, after five years, if no estate has been established, we could forfeit the money, like we would with a lost participant.

Does anyone feel very strongly that the above is not a good solution?

Thanks!

 

 

 

 

 

[MoJo]

10 minutes ago, 401(k)athryn said:

Does the plan sponsor have a responsibility to find beneficiaries or pass on small estate information? 

 

Based on a conference call I had with the DOL this morning - the answer is "yes."  They wanted to know 1) if the plan sponsor (and by extension the service provider) knew where all the vested terms were, and 2) why the small balances had not been cashed out (despite the cash out provision saying "may" be cashed out, their theory was that as long as the money was in the plan, it was incurring fee expense that it didn't need to.) - and both of those are "fiduciary" issues in their eyes.

Shaking my head wondering why the fees incurred in an institutional account would cause them more concern than the retail fees of any IRA, but that is where they come down on it.

[ESOP Guy]

To be clear when I said treat this like a lost participant to me that means you have some duty to try and find them.  Before you can forfeit the balance that is part of the process.  The DOL is clear on this point you have to do a search. 

What I am unsure of what that looks like with this fact set.  They aren't lost in the sense of unknown address but lost in the sense no one seems to know who the heir is.  That is why I haven't comments before now on what that search would look like but some kind of search seems needed.

Not sure it will help much as it seems like you are in contact with of some family.  But I have had great success in the past finding missing death beneficiaries by finding the person's obituary online.  They often times list surviving family.  In one case it listed the name of the church the service was at.  The pastor of that church got us in contact with a sibling. 

[MoJo]

14 hours ago, ESOP Guy said:

To be clear when I said treat this like a lost participant to me that means you have some duty to try and find them.  Before you can forfeit the balance that is part of the process.  The DOL is clear on this point you have to do a search. 

What I am unsure of what that looks like with this fact set. 

And therein lies the problem.  If the search produces "heirs" (whether or not they are the ones who would actually take under the laws of descent and distribution) can you then conclude the "heirs" are "lost" such that you can forfeit the balance?

Personally, I don't think so.  I think the DOL is clear that you have to take reasonable steps to "find" the beneficial owner of the account and can *only* forfeit if you can't find anyone.  If you have identified potential owners, would it not be reasonable to maintain the balance intact, and urge those you've found to make a claim (even to the point of being helpful in facilitating them to do so)?

We often look at obits, and use Spokeo and Ancestry.com to do the research to find benes - and when appropriate, point them to the small estate "forms" section of the probate court.

[K2retire]

Obits can be helpful. But if there have been any family feuds, they can also be inaccurate. I've seen more than one where estranged siblings or children were omitted. I've also seen parent/child relationships listed that were really step-parent/step-child. In some states adoptees are permitted to inherit from their biological parents. In others they are not.

[Peter Gulia]

MoJo, thank you for sharing information about DoL/EBSA staff views.

Was the EBSA employee's reasoning grounded on the idea that if a fiduciary has discretion about whether to pay a distribution, the fiduciary must use the discretion in favor of whichever outcome advances the purpose of providing retirement income to the participant?

Was the DoL/EBSA speaker someone from the office of interpretations?  Or an examiner?  Or a benefit analyst?  Or some other kind of staff person?

[MoJo]

1 hour ago, Fiduciary Guidance Counsel said:

MoJo, thank you for sharing information about DoL/EBSA staff views.

Was the EBSA employee's reasoning grounded on the idea that if a fiduciary has discretion about whether to pay a distribution, the fiduciary must use the discretion in favor of whichever outcome advances the purpose of providing retirement income to the participant?

Was the DoL/EBSA speaker someone from the office of interpretations?  Or an examiner?  Or a benefit analyst?  Or some other kind of staff person?

The DOL officials were a local office senior investigator, and a National Office representative - and the inquiry was in connection with a client who is under audit.  Many topics were covered, but with respect to the issue at hand, the inquiry started with respect to mandatory cash-out processes,missing participants, and the efforts undertaken by the plan sponsor (fiduciary) or as directed by the plan sponsor to us (non-fiduciary bundled service provider).  The conversation morphed into practices that involved lost or potentially lost participant (i.e. processes when statements are returned with bad addresses and the like).  Part of that then dealt with beneficiaries of known deceased participants, and how the plan sponsor contacted them to ensure the plan "knew" who had beneficial interests in the plan.  My take on that conversation had to do with both ensuring RMD rules on death were handled appropriately, and also ensuring that no "wasting" account balances existed - without someone controlling the investments/upon whom the annual fee disclosure would be served - both of which are fiduciary issues.

This has been one of the most extensive audit's I've ever seen - topped only by a DOL audit of another client going on simultaneously (different local office, but including National as well) that is about 3 months ahead of this one - but concentrating on the same issues (and has been going on for over a year without end in sight).

[Peter Gulia]

Thanks for sharing the story.

As someone who previously served over 21 years inside a big retirement-services provider, I remember what it's like to have an employer react to situations like those you describe.

 

[MoJo]

55 minutes ago, Fiduciary Guidance Counsel said:

Thanks for sharing the story.

As someone who previously served over 21 years inside a big retirement-services provider, I remember what it's like to have an employer react to situations like those you describe.

 

I can assure they are not pleased - and to the extent some of the questions are related to services provided by us, they aren't happy with *us* and just want the audit closed - no matter what we think is appropriate, or what it would cost us to change business processes to suit the often unreasonable demands of the DOL (as an example - they don't understand the group annuity business and have repeatedly asked us why participants can't invest directly in mutual funds and instead have to invest in mutual funds through a separate account (BECAUSE IT'S THE LAW FOR AN INSURANCE COMPANY - who must "wrap" investments in an insured product and CAN'T sell investments directly!  DUH!).  It's scenarios like this that cause clients to look elsewhere....