Downloadable version (pdf) of this article.

A few years ago I penned what I thought at the time was a fairly thorough article regarding the need for a reasonable, legally-binding beneficiary election for all retirement accounts – in particular 401(k) accounts.

Based on what we continue to see and hear about beneficiary elections I think it's safe to say that a refresher course is a good idea. The four main trends we – unfortunately – continue to see regarding beneficiary elections are:

• Non-spousal elections made by married participants.
• Naming minor children or pets as the beneficiary.
• Not updating beneficiary elections to reflect current marital or family status.
• No election at all. In plans that utilize electronic or phone enrollment where beneficiary designations are not required to begin making contributions it's not unusual to see that up to 50% of the participants have no beneficiary election on file.

Thinking that your ex-spouse or your three-year-old will carry out your wishes regarding your assets is a high risk play – especially when you may not have even made your wishes clear to begin with. Gentle prods on this topic have not evoked change so we'll invoke shock-and-awe and show (via links) how the four main trends play out:

Choosing a non-spouse as a beneficiary without a spousal waiver:

http://www.psca.org/DCIMagazineMembers/tabid/133/ctl/Detail/mid/490/Id/779/Archive/Default.aspx

http://ftp.resource.org/courts.gov/c/F2/968/968.F2d.1214.91-5913.html

Naming minor children, or a pet, as a beneficiary:

http://news.morningstar.com/articlenet/article.aspx?id=298073

http://writ.lp.findlaw.com/grossman/20080715.html

http://www.brolaclaw.com/planning-for-your-pets-care.aspx

Outdated beneficiary elections:

http://www.hcmmlaw.com/blog/2009/03/07/ex-wife-gets-former-hubands-401k-savings-and-investment-plan-despite-divorrce-decree-language-to-the-contrary/

http://www.plansponsor.com/401k_Benefits_Properly_Paid_to_Ex_Wife.aspx

No election (general guidance):

http://www.401khelpcenter.com/mpower/feature_1beneficiary.html

http://www.lifestyleportfolios.com/files/4175/BENEFICIARY%20INFORMATION%20Word%202003.pdf

Buried within the horror stories of squandered wealth and angry relatives are some truly helpful points. It is also worth pointing out that the rules governing qualified plans (such as a 401(k)) are different than those governing IRA accounts or life insurance. Well documented case in point:

http://www.erisalawyerblog.com/2010/01/erisa9th-circuit-rules-that-er.html

http://www.axa-equitable.com/plan/estate/401k-IRA-beneficiary.html

Finally, it's worth pointing out that the cost of raising a child – NOT including costs related to college – is estimated to be anywhere from $100,000 - $250,000. Per child. If you have children and you do not have a will you are choosing to "save" the small amount of money that would go towards the drafting of a will while potentially exposing some or all of the money you have saved AND the future care of your child to parties unknown.

All of your questions related to your beneficiary election can be answered by the attorney who drafts your will. That will might just be the best investment you ever make.

Please note that Cobb Retirement Solutions does not offer tax or legal advice nor do we warrant the accuracy of any of the information provided via the links found in this article.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.