Compliance and recordkeeping questions can be a frustrating aspect of administrating a retirement plan. For example: who is responsible for the recordkeeping of 401(k) beneficiaries? Let's answer this specific question and use it as a proxy to address other similar recordkeeping questions.
Start with the Plan Document
Many compliance questions have answers that start in the same place: the plan document. That's where you should initially look to answer compliance and recordkeeping questions.
The plan document should state who is responsible for maintaining plan records, such as beneficiary designations. Many plan documents will point to the plan administrator (also called a plan sponsor and is often the employer on the plan) as the person(s) responsible for maintaining beneficiary designations.
Communication is Key
However, plans are allowed to delegate responsibilities beyond what is written in the plan document. For example, the plan administrator could delegate beneficiary maintenance to a specific recordkeeper. These types of arrangements are becoming more and more popular, especially as electronic enrollment becomes more ubiquitous.
The importance of communication between the plan administrator and the designated recordkeeper cannot be overstated. Situations have arisen where neither entity is maintaining beneficiary records. Why? Miscommunication. Each party had thought that the other was responsible.
The plan participants are the ones who ultimately pay the price for this miscommunication. Loss of participant trust is a steep price to pay for such a preventable mistake.
Clear communication between the administrators and any delegates can prevent such headaches.
Collecting Does Not Equate to Responsibility
A common sticking point that some plan sponsors run into is assuming that simply because an outside party is collecting the information that they are also responsible for these records. It is common to see a recordkeeper who maybe collect and report beneficiary information via their website. In the fine print, many of these recordkeepers legally position themselves as functioning under a plan adminstrators directive rather than being the official beneficiary directive.
In cases where a recordkeeper is willing to function as the primary record archive, plan administrators need to be aware that changing off that recordkeeper in the future may involve manually pulling all beneficiary reports or re-papering all participants to transition platforms.
Good Questions to Ask to Maintain Beneficiary Data
To properly "maintain" beneficiary data, some good questions (that either the plan administrator or a recordkeeping delegate should ask) are:
Which entity is responsible for recordkeeping? (reiterating the above - clear communication is vital!)
Is the same entity responsible for both obtaining beneficiary data and storing/keeping that data? It typically makes sense for the same entity to do both, but make sure you do due diligence for your plan.
Are there clear procedures for gathering and updating beneficiary data? What's the frequency of updates? Are beneficiaries re-checked after significant life events (marriage, divorce, deaths in the family, etc.)?
If a participant does not set a beneficiary, what action is taken? If a participant does not respond to an "update request" regarding beneficiaries, what action is taken? Make sure you have answers before the scenario arises.
What data is being collected about the beneficiary? Social Security numbers, for example, are almost always needed to ensure the correct beneficiary is identified. Is that data being stored securely?
Who is nudging the plan participants to ensure their beneficiaries are up to date? How is that communication being done? If a third party is doing it, are they addressing the participants in a manner that the plan administrator finds acceptable?
Summary
Both the plan administrator and the designated recordkeeper have a vested interest in ensuring that participants’ records are maintained accurately and updated frequently. It improves the participants' experience and ultimately makes for a healthy 401(k) plan.
Clear communication and forward-thinking can ensure that the responsibility for maintaining beneficiary data---and any other participant data---is never in doubt.