Self-Directed 401(k) Beneficiary Form

All the plan documents you receive for your Solo-K plan (also referred to as a Uni-K, Self-Directed 401(k), Self-Administered 401(k), Individual 401(k) Plan) are important in their own right.  The self-directed 401(k) beneficiary form is no exception.  In the concern of making sure all documents are being executed for the plan, some Trustees forget to execute the self-directed 401(k) beneficiary form. Obviously, the Trustee cares, they just forget.  But, while completing the form is of utmost importance, there are some other nuances related a self-directed 401(k) beneficiary form that you should keep in mind.

“With Great Freedom and Flexibility Comes Great Responsibility”

This quote vaguely resonates with a beer commercial I’ve seen on TV.  But, we are not talking beer.  The freedom and flexibility you have with your Solo-K plan is wonderful.  No doubt about it.  But, there is a great responsibility in making sure you take the appropriate steps to ensure that you administer your plan in compliance with IRS and DOL regulations.  Remember, you are the Trustee!

But, you ask, “I know I need to complete the self-directed 401(k) beneficiary form, but it’s not like I need to turn it in to the IRS.  So, is the whole point of this conversation just to tell me I need to complete the form?  I know I am supposed to complete the self-directed 401(k) beneficiary form.”

True, nothing you need to complete and forward to the IRS.  True, you are an adult, no need to necessarily read a blog site reminding you to execute the self-directed 401(k) beneficiary form.  True, you are not even being forced to complete the form.   But, one little nugget of information may just be of assistance….

The Self-Directed 401(k) Beneficiary Form — Who IS Your Beneficiary?!

What a dumb question!!  But, is it?

It goes without saying that you need to actually complete the beneficiary form.   But, did you:

  1.  Receive your plan documents (check),
  2.  Complete your beneficiary form (check),
  3.  Tuck it away for safe keeping (check)

You figure you are set….but, are you?  Did you tuck it away so well where no one can find it?

Unlike W-2 employee who completes a beneficiary form (e.g., company provided life insurance) with their employer, in an individual 401(k) plan, you are the employer, employee, plan administrator…everything!  Most likely, no other individual or company is maintaining your executed plan documents.  Not to be blunt, but if you pass away, who knows where the self-directed 401(k) beneficiary form is?  And, if you say that would never happen…well, good!  But it does happen.  Even though completed the beneficiary form, how does anyone know that is your intent if they do not have the self-directed 401(k) beneficiary form or know exactly where the original can be located.  Again, don’t think it can’t happen….I’ve seen it happen.

And, really sobering, what happens when “life happens”?  Got divorced and still have your ex listed as the beneficiary….0ops (unless, of course, you choose that election).  Your listed beneficiary has died…oops, can’t give the money to someone who has passed. These are life issues which can drastically affect your intentions on who you want the assets to be given to.

Your Self-Directed 401(k) Plan “Housed” at a Bank or Brokerage Firm

Keep in mind that you will be “housing” your account at a local bank or brokerage firm that permits trustee-directed 401(k) accounts.  Many people think that the bank or the brokerage firm magically HAS this information. Well, it probably would be magic!  You see, neither the brokerage firm or your bank is responsible for YOUR plan.  They are not providing the plan documents, they are not assisting in the administration or update of the plan documents….it is your plan!  Call your bank or brokerage firm and ask them who they have listed as the beneficiary….you won’t get too far. Now, would you want to have your beneficiary be faced with the same dilemma upon your death?

Example:  Client originally “housed” his Solo-K account with his plan documents at a brokerage firm.  He completed the self-directed 401(k) beneficiary form.  Recently, he established a Living Trust to benefit his child. He went to the brokerage firm and asked them what he needed to do to update his beneficiary information.  You got it….they told him they were not responsible for that information as it was a Trustee-directed plan.  He called to ask how this beneficiary change was to be made as the brokerage firm was of no assistance to him.  SIMPLE, amend and update the self-directed 401(k) beneficiary form.  He KNEW this as soon as I told him….but, it was a minor point where he got momentarily confused.  And, by the way, this is a smart guy who dots “I’s” and crosses “T’s”…he just never gave thought to it and assumed the brokerage company had that information.  It is a good example that you cannot rely on anyone other than yourself to ensure this beneficiary designation is completed and adequately shared with “need to know” individuals.

Another Example:  This second example got more complicated.  The client passed away and it was unclear if the client executed the self-directed 401(k) beneficiary form.  The client’s life partner (not spouse) could not initially find the beneficiary form.  He went to the brokerage firm to “find out” who was listed as the beneficiary.  You got it….the brokerage firm did not have any record of the beneficiary.  The life partner eventually found the beneficiary form, but it is now being contested by the client’s siblings claiming they are entitled to the nearly $500,000 held in her 401(k) plan.  It did not help that the client’s brother was also the administrator of the estate and was challenging the life partner’s claim to the plan’s assets.

For the protection of your beneficiary:

  1.  Fill out the self-directed beneficiary form;
  2. Keep the original in a safe place and strongly consider providing a copy to a third party (e.g., the beneficiary, if appropriate) and letting the beneficiary know where the original is located (e.g., safety deposit box, home vault);
  3. Give the third party or beneficiary a copy of the form; and,
  4. It is never a bad idea to address beneficiary issues with an attorney.

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. One must always consult with their respective professional in all such matters.