By Mira Copeland
For many retirement plan participants, a beneficiary designation might just sound like another confusing piece of retirement plan jargon, but designating a beneficiary is a relatively simple step of setting up your retirement accounts that should not be overlooked.
What is a beneficiary? Your beneficiary for your retirement account is the institution or person who will inherit your account in the event of your death. Retirement accounts typically allow for a primary beneficiary and a secondary beneficiary. A secondary (or “contingent”) beneficiary would receive the assets if your primary beneficiary has predeceased you.
For married participants, most retirement plans require that accounts be paid to spouses unless written spousal consent is obtained to designate alternates. A common arrangement for families is to designate the spouse as a primary beneficiary and the children as secondary beneficiaries. If you do this, make sure to update the designation upon the arrival of your next bundle of joy. Also, make sure to update your beneficiary designation if you get divorced.
Why is it important to take the time to designate a beneficiary for your retirement account? Because your will won’t cover it. Employer-sponsored retirement accounts, individual retirement accounts (IRAs), and life insurance proceeds are generally exempted from your will. Instead, those accounts will automatically pass to the beneficiaries you’ve named for them, even if you no longer want those individuals (i.e., a former spouse) to receive the funds. And if you forgot to update your beneficiaries after you had Shiloh, then little Vivienne and Knox won’t receive their shares of your 401(k).
If you don’t designate a beneficiary, upon your death your 401(k) account would be assigned as specified in the plan document—typically to your spouse, children, or closest surviving immediate family member—or to your estate if no qualifying relations exist. The legal process of determining who receives the funds can be time-consuming, laborious, and costly for the potential recipients and the plan administrator, and may overlook a needy dependent in an unconventional family structure. If you have a beneficiary on record, however, your account can be passed directly to that beneficiary, who may be able to access it quickly in a time of need.
Designating a beneficiary typically requires a submitted form (it may need to be notarized if you’re designating someone other than your spouse). Many plans also allow you to designate your beneficiaries online; participants in a plan whose recordkeeping is handled by Milliman, for example, can typically complete their beneficiary designations online at Millimanbenefits.com.