Nonprofit organizations commonly offer a variety of retirement benefits to employees, including 403(b) plans and other employer-sponsored retirement arrangements. Certain tax-exempt organizations may also maintain 457(b) or 457(f) deferred compensation arrangements, particularly for executives and other members of management. While these plans provide valuable retirement security and can assist nonprofits in attracting and retaining employees, they also create an often overlooked administrative responsibility: ensuring that employees complete and maintain current beneficiary designation forms.
A beneficiary designation determines who will receive plan benefits if a participant dies before receiving all benefits payable under the plan. Unlike a will, which generally governs the disposition of a person’s probate estate, or a trust, which generally governs assets held by or transferred to the trust, retirement plan assets are generally distributed according to the terms of the retirement plan and the applicable beneficiary designation. As a result, an outdated, incomplete, or missing beneficiary designation can create significant problems for surviving family members and the nonprofit organization responsible for administering the benefits.
Beneficiary designations are particularly important for 403(b) and other qualified defined contribution plans, where employees may accumulate substantial account balances over the course of their careers. If a participant dies with an account balance remaining, the plan administrator must determine the person or persons entitled to receive the participant’s benefits.
Beneficiary designations can also be important under 457(b), 457(f), and other deferred compensation arrangements maintained by tax-exempt organizations. A 457(b) arrangement maintained by a tax-exempt nonprofit differs materially from a 403(b) plan because it generally must remain unfunded. Deferred amounts remain the employer’s property and are available to its general creditors, and participants’ or beneficiaries’ rights are contractual under the arrangement rather than based on ownership of separate participant accounts. The rules governing these arrangements can differ significantly, making it important for nonprofits to review the specific terms of each plan rather than assuming that the same beneficiary rules apply to every benefit program.
Unfortunately, beneficiary forms are often completed when an employee first becomes eligible for a plan and then forgotten. Over a career spanning twenty or thirty years, an employee may marry, divorce, remarry, have children, or experience the death of a previously designated beneficiary. If the employee fails to update the designation, the retirement benefits may ultimately be distributed in a manner that no longer reflects the employee’s wishes. In addition, applicable federal law and the terms of the plan may impose requirements concerning spousal rights that must be considered before benefits are distributed.
Nonprofits can help prevent these issues by regularly reminding employees to review their beneficiary designations. New-hire onboarding, annual benefits enrollment, retirement planning meetings, and communications following major life events provide useful opportunities to remind employees to confirm that their beneficiary information remains current. Employers should be careful, however, not to advise employees regarding whom they should designate. The organization’s role should generally be to encourage employees to review and properly complete their elections.
Maintaining accurate beneficiary records is only part of the equation. Nonprofits and their plan administrators must also ensure that completed beneficiary designations are properly retained and can be retrieved when needed. When a participant dies, the inability to locate a valid designation can create significant uncertainty. The plan document may contain default beneficiary provisions that determine who receives the benefit when no valid designation exists. Those provisions may produce a result that differs substantially from what the participant or surviving family members expected.
Missing beneficiary forms can also lead to disputes among surviving family members. Former spouses, current spouses, children from prior relationships, and estate representatives may assert competing claims to the benefits. Human resources and benefits staff may spend considerable time gathering historical records, communicating with recordkeepers and third-party administrators, responding to competing claims, and consulting legal counsel. In some circumstances, a dispute can escalate into litigation.
The consequences can be even more serious when a valid beneficiary designation exists but is not followed. If benefits are distributed to the wrong person despite a valid designation being maintained by the plan, the intended beneficiary may seek recovery of the benefits. Depending on the type of plan and applicable law, the organization and those responsible for plan administration may also face claims concerning their administration of the plan or compliance with the plan’s governing documents.
To reduce these risks, nonprofits should adopt clear procedures for collecting, storing, updating, and retrieving beneficiary designations. Organizations should also coordinate with their retirement plan recordkeepers and third-party administrators to clearly identify which party is responsible for maintaining the official beneficiary record and performing related administrative functions. For an ERISA-covered plan, identifying a recordkeeper or third-party administrator as responsible for maintaining beneficiary records does not, by itself, alter the duties of the named plan administrator under the plan documents and ERISA. Periodic administrative reviews can help identify missing beneficiary elections, inconsistencies between employer and recordkeeper records, and outdated procedures.
Vendor transitions deserve particular attention. When changing recordkeepers or third-party administrators, nonprofits should ensure that all existing beneficiary designations are obtained from the outgoing provider and successfully transferred to, or otherwise preserved for, the incoming provider. Depending on the circumstances, it may also be advisable to require or strongly encourage all participants to complete new beneficiary designation forms with the new provider, which can both confirm participants’ current elections and reduce uncertainty regarding whether historical beneficiary information transferred correctly.
Nonprofits should also periodically review accounts maintained for former employees who have terminated employment but continue to have balances in the plan. Where permitted by the plan and applicable law, organizations should consider whether available distribution or mandatory cash-out provisions can be used to reduce the number of small or inactive accounts that must continue to be administered. Reducing the population of terminated participants with outstanding balances can lessen the administrative burden associated with maintaining beneficiary information, locating former participants and beneficiaries, and resolving death benefit claims years or even decades after employment has ended.
Finally, nonprofits should review the beneficiary provisions contained in each retirement and deferred compensation plan they maintain. A 403(b) plan and a non-governmental 457(b) plan should not automatically be treated as though they operate under identical rules. Procedures should reflect the governing plan document and applicable law, including any applicable spousal consent requirements.
Ultimately, beneficiary designations are among the most important records associated with an employee’s retirement benefits. For nonprofits sponsoring 403(b), 457(b), 457(f), and similar arrangements, a current and properly maintained beneficiary designation can help ensure benefits are distributed appropriately after an employee’s death. By encouraging regular reviews, maintaining reliable records, coordinating responsibilities with service providers, and carefully following the governing plan documents, nonprofit organizations can better protect employees and their families while reducing administrative burdens, disputes, and potential legal exposure.