Tuesday, May 17, 2011

ERISA Trumps everything…..

In the latest edition of Investment News Weekly, they published an article called ‘401(k) rights trumped by ERISA', linked here http://www.investmentnews.com/article/20110515/REG/305159996.

This was an unusual article to see published in a general information publication like Investment News, unusual in that it deals with a highly specific legal ruling dealing with Participant, Spousal and Named Beneficiary rights in a death situation.

The gist of the article is that the participant named his three children as beneficiaries to his 401(k) Plan in the event of his death. He did so properly using a beneficiary form and did so after the passing of his first wife, so spousal consent was unnecessary at the time the form was completed. Flash forward some time later and he remarries, doesn’t update the form, and six weeks later passes away. The new wife (now a widow) is now in a legal battle as to who has rights to the 401(k) assets. The children say they do as they were named on the form, the spouse says she does because she never waived her rights to the assets. The court sided with the spouse and based on the facts/circumstances listed in the article seems to be the appropriate decision.

The important takeaway here is that ERISA (which is our rule book) trumps everything! It may have been the deceased participant’s wishes to award the assets to his children, but it doesn’t matter. The rules state that a spousal waiver must occur otherwise the wishes of the participant are irrelevant. It doesn’t stipulate in this rule as to whether or not the participant was, in fact, married when he/she filled out the form!

Often I’m asked by financial advisors where/how they can add value and earn their fee. This question is often posed in the context that my firm acts as a Discretionary Trustee and we make 100% of the Investment Decisions for plans which is often an area that financial advisors provide service.

This is a great example of how an advisor can add value to a plan. It isn't sexy, but it is very effective. If the advisor stays front and center with the participants of the plans that they are serving and understands the rules of the game, than they can ensure current and complete forms, that intentions are being followed and situations like the one above, however uncommon, don’t occur. This article can be a great sample of a scenario that can be presented to Plan Sponsors as to where/how advisors value is earned and there are a million other small ways like this that are part of the service.

By the way, aiding in this manner is not a fiduciary act, so for those Registered Reps out there who aren’t permitted to act as fiduciaries, there is still a way to build a value proposition and not provide fiduciary services directly yourselves.

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