Unclear Beneficiaries Force Retirement Plans into Court



To avoid disputes, include unambiguous designation procedures in plan documents

By Jonathan A. Kenter and Gail H. Cutler, ©Troutman Sanders LLP Apr 1, 2015

The U.S. Court of Appeals for the 9th Circuit’s ruling in Becker v. Williams, handed down on Jan. 28, 2015, highlights the pitfalls of maintaining ambiguous plan rules governing beneficiary designations. Plan sponsors who want to avoid disputes should include clear procedures in their plan documents and summary plan descriptions (SPDs) for designating and changing a death beneficiary.

A Cautionary Tale

A long-term Xerox employee participated in two company retirement plans. In 2002, he designated his then-wife as his beneficiary. Following his divorce in 2006, the participant "telephonically undesignated" his ex-wife and identified his son from a prior marriage as his new beneficiary. In January of 2011, he gave similar directions during another telephone conversation. After each call, the participant was sent beneficiary change forms.

On at least one occasion, the forms were returned to the participant for signature. Moreover, Xerox confirmed in writing that the participant's designation had been made by phone, referenced the date of the participant's phone call and returned partially completed forms "to finalize" and "to validate" the beneficiary designation. The participant was subsequently notified that the forms were invalid because they were not signed and/or dated. Following the participant's death in May of 2011, his ex-wife and son both submitted claims for the benefits. In response, the plan administrator declined to award the benefits to either claimant and initiated an interpleader action to have the court identify the proper beneficiary.

The district court granted summary judgment in favor of the ex-wife. On appeal, the 9th Circuit reversed the summary judgment and remanded the case to the district court noting that a reasonable trier of fact could determine that the participant had intended to designate his son as his beneficiary and that his phone calls constituted substantial compliance with the plans' governing documents.

Both retirement plans contained language requiring participants to designate beneficiaries, but neither required a written, signed document for unmarried participants.In addition, the SPDs stated that participants could visit the benefits web site "or call the Xerox Benefits Center…to complete or change [his] beneficiary designation at any time."

Although there were no issues of legal compliance with respect to the plans' documents or operations, the plans, nevertheless, were drawn into a lengthy legal dispute. This dispute could not be quickly resolved through summary judgment because, as the 9th Circuit pointed out, the question of whether the participant substantially complied with the terms of the retirement plans was inherently factual (it involved intent and subjective feelings). Further, the 9th Circuit held that the decision to initiate the interpleader rather than adjudicate the competing claims of the ex-wife and son demonstrated that the plan administrator elected not to exercise its discretion to construe the terms of the plans.

Accordingly, the 9th Circuit reversed the award to the ex-wife and instructed the district court to review the parties' entitlement to the benefits de novo without any deference to the plan administrator's actions, suggesting that absent a plan-mandated requirement that beneficiary designations be written instruments signed by the participant, the court could reasonably award the benefits to the son.

Practice Tip for Plan Sponsors

With some changes to the plans' governing documents, this situation could have been avoided. In light of the Becker v. Williams decision, plan sponsors and administrators should review plan documents, SPDs and beneficiary designation forms to ensure that the beneficiary designation process is clear and unambiguous. Sponsors and administrators should require a written and signed beneficiary designation be submitted to the plan prior to the participant's death.

Jonathan A. Kenter is a partner in the employee benefits and executive compensation practice at Troutman Sanders LLP. Gail H. Cutler is a staff attorney in the firm’s employee benefits and executive compensation practice. © 2015 Troutman Sanders LLP. All rights reserved. Republished with permission. This article is for information only and is not to be considered legal advice.

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