Is it common for a plan to require a beneficiary designation in whole percentages?

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?

17 hours ago, Peter Gulia said:

BenefitsLink neighbors, how does this work in the real world?

American Funds, both on the plan side and for IRAs, wants whole percentages and will reject fractional percentage designations.

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.

I guess I don't understand the big deal with using only whole percentages?  Vendors have done that with contribution enrollments/enrollment forms ("fund selections MUST total 100%").  I suppose, depending on the size of the benefit, 1% could make a difference but seriously how much would you be talking about?  There are 3 of us in my famly, my sister and I had our Mom put our brother at 34% because he is the oldest and the only boy 🙂.  Then again we have no strife in our family, which I know can cause many issues in others - even for 1%!

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.

I can't speak to those providers, but our DB beneficiary forms simply say that the total for the primary beneficary(ies) must equal 100% and the same for any contingent beneficiary(ies) without any further stipulation.

I read that case and, although it appears on the surface that the plan administrator's rejection of the non-compliant beneficiary form was harsh, if I remember, the non-compliance was communicated and participant had every opportunity to correct but failed to do so.

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.

6 hours ago, Peter Gulia said:

Does anyone know what Fidelity does?

 

Not 100% sure but I think we were required to use whole percentages for the contingent beneficiary on my wife's plan that is record kept by fidelity so they were set up 34/33/33 for the kids. I'm pretty sure fidelity is still the record keeper but if not my apologies to fidelity.

Lou S., thank you for your information about Fidelity

BenefitsLink neighbors, do we have clues about Empower, TIAA-CREF, Vanguard, Alight, Voya, Principal, Merrill Lynch/Bank of America, T. Rowe Price, . . .  ?

Fidelity acts as TPA for hundreds of Plans so I don't think you can get a feel what what will do in any particular case.  But I have reviewed their procedures and model orders in hundred of cases over the years and have never seen the sort of restriction to whole number that you mention.  

In dealing with Military retirement plans the DoD FMR require that any computation must be rounded down to two decimal points. 

In 55 years of practice including 36 years preparing pension and retirement documents I have never seen anything like the  Gelschus v. Hogen case.  In that case the facts were as follows:   

Sally A. Hogen made contributions to a 401(k) plan during her employment at Honeywell International Inc. She originally designated her husband, Clifford C. Hogen, as the sole beneficiary in the event of her death. Sally and Clifford divorced in 2002. In the marital termination agreement (MTA), they agreed that "[Sally] will be awarded, free and clear of any claim on the part of [Clifford], all of the parties' right, title, and interest in and to the Honeywell 401(k) Savings and Ownership Plan."

In 2008, Sally submitted a change-of-beneficiary form to Honeywell. She, however, did not comply with a requirement. She allocated "33 1/3%" of the 401(k) benefits to each of her siblings.  The instructions said, "The Allocation % must be whole percentages." Because she did not use whole percentages, Honeywell did not change her designation. Honeywell called Sally and left a message notifying her of the rejection. Honeywell also sent eleven annual statements showing Clifford as the sole beneficiary. She took no further action.

Sally died in 2019, with nearly $600,000 in her 401(k) plan. Honeywell paid the benefits to Clifford.  Robert F. Gelschus, as personal representative of Sally's estate, sued Honeywell for breach of fiduciary duty, and Clifford for breach of contract, unjust enrichment, conversion, and civil theft.

Would you ever in your wildest imagination think that the beneficiary of a 401(k) plan could not receive a fractional share of the Plan owner's account?  I have asked the members of my family law listserv if they always caution their clients, the Participant of a defined contribution Plan, to address this issue in naming the post divorce beneficiary(ies).  Would it be malpractice not to do so?  

Do you know how the scenario set forth above will play out?  Who can sue who and for what?  And what will happen if Plan assets are dissipated by the unintended beneficiary?  Are you familiar with Kennedy v. Plan Adm'r for DuPont Sav. & Inv. Plan, 555 U.S. 285 (2009), Est. of Kensinger v. URL Pharma, Inc., 674 F.3d 131 (3d Cir. 2012), Andochick v. Byrd, 709 F.3d 296, 300 (4th Cir. 2013) and it's progeny, and Metlife Life & Annuity Co. of Connecticut v. Akpele, 886 F.3d 998, 1007 (11th Cir. 2018)?

Did you know that in the case, In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 136 S. Ct. 651, 193 L. Ed. 2d 556, 577 US 136, (2016),  the Supreme Court held that pursuant to 502(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), [29 U. S. C. §1132(a)(3)] a Plan Administrator may not recover overpayments from a Participant's general assets.  Said the Court: 

"We hold that, when a participant dissipates the whole settlement on non-traceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under §502(a)(3) because the suit is not one for“appropriate equitable relief."

Does this ruling, coming as it does from a Federal Court and with respect to Federal law, preempt the ability of the courts of my home state, Maryland, to order the attachment of general assets on a finding that the same behavior by the former spouse amounted to a breach of contract, or contempt of court, or trover and conversion?

This is a bad case for everybody.  

fmsinc, to answer your last question, the Eighth Circuit’s recent decision (following an earlier Eighth Circuit decision) does not preempt State-law remedies that do not involve the retirement plan or its fiduciaries.

As I explained in another BenefitsLink discussion, decisions for the Third, Fourth, Sixth, Eighth, and Eleventh Circuits interpret ERISA as not precluding a remedy that does not involve the plan or any fiduciary of it, and does not frustrate a surviving spouse’s right.

In States’ courts, often the court does not even consider ERISA, especially regarding an already-distributed benefit. (If no plan fiduciary is in the State-law remedies litigation, only the plan’s distributee seeking to keep the benefit has a reason to raise the issue. And even when that person’s lawyer understands the argument, many abandon it.)

States’ courts use remedies to move property from the plan’s distributee to whoever is the rightful taker under State law.

You are right to fear that a plan’s distributee might dissipate the property paid or delivered to that distributee. That’s why another claimant should pursue remedies promptly and vigorously.

PETER --

I've been in the business for more than 47 years  and in National Tax for a Big 4 for 10 years and have seen numerous beneficiary forms and have never seen a "whole percentages " requirement. I've only seen what Cuse Fan has seen and I agree with him and FMSINC--what a bad case.

That said, not sure in my simple brain why any firm cannot take 1/3 percentage of something .

BOB

Bob the Swimmer, thank you for sharing your experience.

I have counseled recordkeepers that allow any set of percentages or fractions coming in, including those that don't add up to 100.

Instead, the plan's governing documents provide proportional adjustment rules that turn whatever the participant stated into something the computers will process.

FWIW, I experimented with my T. Rowe Price account (sorry, no information w/r/t documents or platform): the online system would allow me to change a 50/50 allocation to 50.5% / 49.5%.  It would NOT allow me to change to 50/49.

david rigby, thank you for this helpful information.

Perhaps a system that allows a decimal place diminishes the effects of a one-third or one-sixth problem.

Just my personal opinion, but this is a stupid situation.  I see no reason to require whole percentages.  This 1/3 situation is a prime example of the stupidity.  It shouldn't be required by the plan document or the administrator.  If it's in the plan document, I say change it.  If it's a TPA requirement (Fidelity or Joe-Bag-of-Donuts), get a new administrator if they can't handle fractions or decimals.  The more I think of this, the more ridiculous it seems.  As best I can recall I learned "fractions" in the fifth grade and decimals in the six.  Give me a break.

On 9/9/2022 at 2:45 PM, Peter Gulia said:

BenefitsLink neighbors, do we have clues about Empower, TIAA-CREF, Vanguard, Alight, Voya, Principal, Merrill Lynch/Bank of America, T. Rowe Price, . . .  ?

I reviewed my Empower account. They accept decimals, but the total still needs to equal 100%. 33.33% for three beneficiaries is not accepted by the website.

Responding to Peter, there are plenty of cases explaining the reach of Federal preemption under ERISA. 

Forristall v. Federal Express, Civil Action No. 13-11454, United States District Court, D. Massachusetts (November 21, 2014)

Smithson v. Smithson,  Civil Action No. 1:15-0583, United States District Court, S.D. West Virginia, Bluefield (2015) 

McCarthy v. Estate of McCarthy, No. 14-CV-6194 (JMF), United States District Court, S.D. New York (2015)

Cunningham v Hebert, Case No. 14 C 9292, United States District Court, N.D. Illinois, Eastern Division. November 1, 2016 

In re: Marriage of Steiner and Steiner, No. D071155, Court of Appeals of California, Fourth District, Division One (November 30, 2017) 

Prudential Insurance Company of America v. McFadden, Civil Action No. 6:19-CV-051-CHB, (USDC, ED Ky 2020)  

The one thing I have learned in the practice of law is that you can never take anything for granted.  State courts are happy to dodge hard issues if they can use "Federal preemption" as a convenient shield."  They are like the sword of Damocles hanging about.  And if they cannot use Federal preemption, state courts have other ways to avoid the enforcement and collection of post-distribution suits of pension and retirement benefits.  They will use the state statute of limitations, the doctrine of laches, res judicata, collateral estoppel, failure of the court to reserve jurisdiction to address such issues, expiration of the time limits imposed by the Rules of Procedure that permit a party to file Motions to  alter or amend a Court Order, or to revise, vacate or reform a Court Order or other document, or to remedy an inequity on the grounds of basis of "fraud", "mistake" or "irregularity".  

Here is a 2019 article from the ABA on Federal preemption that does not mention Andochick and the ability of the intended beneficiary to file a post distribution suit to get around the result in Kennedy.  

Also attached is my Memo re: workarounds to the outcome in Kennedy.  

David

ERISA Preemption - ABA 2019.pdf RETIREMENT AND LIFE INSURANCE BENEFITS ERISA PREEMPTION etc.pdf

C.B. Zeller is right.  No human or computer can divide anything exactly into thirds.  Somebody has to get the extra penny.  The same is true of other fractional divisions come to think of it.  

On 9/10/2022 at 9:21 AM, Peter Gulia said:

david rigby, thank you for this helpful information.

Perhaps a system that allows a decimal place diminishes the effects of a one-third or one-sixth problem.

You still have the problem just with lower stakes, except in the case cited where the entire beneficiary designation was thrown out.

I.e., with two decimal places allowed for the percentage, you're still a stuck with three 33.33% designations (risking invalidation) or somebody gets 33.34%.

1 hour ago, fmsinc said:

C.B. Zeller is right.  No human or computer can divide anything exactly into thirds.  Somebody has to get the extra penny.  The same is true of other fractional divisions come to think of it.  

$3???

Roycal, thank you for describing your view.

WCC, thank you for the helpful information about Empower.

While that regime is not ideal (for several reasons), perhaps it lessens a participant’s discomfort about being pushed to slightly favor a beneficiary over others.

C.B. Zeller, thank you for your explanation of a business point. And from my experiences with big recordkeepers, I know many business decisions have several layers of complexity about how much customer-friendliness customers will pay for.

fmsinc, thank you for your article about strategies and steps a domestic-relations lawyer might consider. And your observations remind me of an astute lawyer’s saying I heard: “Lots of things can happen in court, all of them bad.”

Here’s a story about seeing that someone must get an odd cent or dollar (or two, or three):

I administer a decedent’s estate. It has four testamentary beneficiaries, with equal shares. So far, every interim distribution has been in four exactly equal shares. But many of the estate’s Form 1041 amounts (passed through into beneficiaries’ K-1 reports) were not neatly divisible by four. For those amounts, the tax-preparation software the certified public accountants use applies a series of randomizer formulas to allocate an odd amount so the sum of the four K-1 reports on an item equals the 1041 amount. Further, the formulas are designed so a beneficiary stuck with an extra dollar or two for an earlier item is not allocated an odd share for a later item, so the sums of K-1 pass-through income items are equal (or as nearly equal as possible) among the beneficiaries. What I’ve liked is that the software does this with no exercise of my discretion. And I could explain to the beneficiaries how none had been unfairly advantaged or disadvantaged.

CBZ, I noticed you avoided being RATIONAL with your sample percentage.

(Better than assigning (1+i)/(2-5i) as a fraction of one's retirement benefit to a beneficiary.)

On 9/12/2022 at 2:14 PM, fmsinc said:

C.B. Zeller is right.  No human or computer can divide anything exactly into thirds.  Somebody has to get the extra penny.  The same is true of other fractional divisions come to think of it.  

Ahhh, but thirds mean we are dealing with 9's.  Anyone with a mathematical background can tell you that 99.99% does equal 1, so no extra decimal, penny, farthing, or bit is required.  Try it on your calculator, it can do that calc just fine!

On 9/8/2022 at 1:34 PM, Peter Gulia said:

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.”

Is "class of beneficiaries" a defined term? If not, then maybe it is reasonable to state that the "class" are the 3 children and they get 100% shared equally. 

kpension, I won't defend, or interpret, Honeywell's (or any plan's) "whole percentages" provision.