It has been a long winter in New England, but we’ve just moved the clocks ahead and soon spring will be here. The storms are over, the snow has melted and now it’s time to clean up the yard.
I recently found a winter hat that had gone missing after the first snow storm of the year. It was in my backyard for months, but we couldn’t find it because the grass has been covered with a blanket of snow since Christmas.
The old adage, “out of sight, out of mind” certainly held true because after a week or so I sort of forgot about that hat and resorted to wearing another one we had in the closet.
It is amazing how many people have misplaced 401k accounts. You might think it inconceivable that someone would “lose” the information about an investment worth thousands of dollars, but it is not all that uncommon.
For frequent job changers, trying to keep up with the paperwork on several different orphan 401k accounts can be an administrative nightmare.
Losing track sometimes happens after a move when the mail forwarding order expires or after a name change following marriage or divorce.
At other times, the account information is lost when a former employer declares bankruptcy or when the owner of a small company dies and the company closes its doors.
Trustees have a fiduciary liability to distribute the plan’s assets, but sometimes this doesn’t occur, especially when the trustee is a former employee who is no longer being paid. The good news is that retirement funds invested in 401k plans belong to the employee, not the employer, so even when a company files bankruptcy or ceases operations, plan participants are protected.
Because assets continue to be invested, amounts that can be reclaimed are sometimes substantial. If you think you or a family member may have money in an abandoned plan,search the Department of Labor’s database, http://www.askebsa.dol.gov/AbandonedPlanSearch/
The 401k Beneficiary Form kept in the Human Resource Department of your old company is often more important than the will or trust that was carefully crafted by your attorney.
That’s because a will or trust has virtually no effect on how your retirement account assets are distributed to your heirs.
Instead, 401k (and IRA) accounts are transferred according to the provisions listed on your beneficiary form. And all too often these forms are hastily filled out during company enrollment meetings and are never given a second thought.
Here are four of the biggest Beneficiary blunders:
Mistake No.1: You,your heirs or your old employer can’t find the form.
In a recent ruling, the United States Supreme Court made it clear that without a proper beneficiary form you are stuck with the default provisions of your company’s plan. Don’t take it on faith that the form you filled out a dozen years ago is still filed correctly at your old company. If the form is lost, it doesn’t matter if your will, divorce decree or other legal documents provide different instructions.
When the default provisions say your account should be paid to your estate, that’s what will happen even if this action results in thousands of dollars in extra taxes or probate costs.
Mistake No. 2: The form is filled out incorrectly or is out-of-date. Sometimes what seems like a simple oversight can accidently disinherit those you want to favor. A million dollar mistake occurred in 2001 after Anne Friedman died of a heart attack and her entire pension of almost $1 million went to her estranged sister rather than her loving husband of 20 years. This travesty happened because the beneficiary form on file was completed years before Ann and her husband met in 1978. The form had been forgotten by all except the sister who refused to give up her new found wealth.
Similar tragedies can occur when adult children die before their parents. In cases like this, 401k proceeds usually skip the family of the deceased beneficiary and are instead shared only by the surviving children.
Mistake No. 3: Listing a minor as beneficiary. When a minor child inherits a 401k directly, a court-appointed legal guardian must be named to administer the funds on the child’s behalf. If this happens, your family will get tied up in the court system with all the cost and aggravation that involves – and with outsiders making decisions that impact your family’s welfare.
Mistake No. 4: Not naming a contingent beneficiary. If your primary beneficiary isn’t around to collect your 401k, and you haven’t named a secondary beneficiary, the Probate Court will likely liquidate your account in a lump sum and force the immediate payment of substantial federal and state taxes. This simple oversight robs your children and grandchildren of the opportunity to stretch your distributions –and the tax bite—over their lifetimes. Stretching the distributions like this allows the investments to continue to grow tax deferred and may result in substantially greater inheritances.
A Spring Cleaning Reminder:
Don’t make the same mistake I made when my hat was forgotten once out of sight. Instead, when you grab your rake and begin to clean your yard this spring, remember that you may have some old 401k plans that need tidying up too. If you have old 401k accounts, consider rolling that money over to your own consolidated IRA.
About this column: Steve Davis is a local CERTIFIED FINANCIAL PLANNER™ who has been helping clients for more than 20-years. You can find out more about Steve and his company, Davis Financial at www.talkwithdavis.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial Member FINRA/SIPC.