When it comes to investment accounts, such as 401(k)s and IRAs, financial professionals will generally tell you that the less you look at them, the better.
As long as you have a broadly diversified portfolio that fits your risk tolerance, the idea is that you won’t make much profit worrying about the daily ups and downs of your investments. Instead, sit back and watch compound interest work its magic over the decades you invest.
There is one important exception to the rule, however, and it has nothing to do with the stocks, exchange-traded funds or mutual funds you own. If you don’t regularly check to make sure your beneficiaries are up to date, you could be making a costly mistake, says Ed Slott, a certified public accountant and founder of IRAHelp.com.
“It’s the number one mistake most people make,” he says. “They think everything is taken care of, but the beneficiary form takes precedence over the will. Most people don’t know that and don’t update their beneficiary forms.”
This is why, if you haven’t updated your beneficiaries since you opened your accounts, it’s worth checking as soon as possible.
In the event of your death, your broker or plan administrator distributes your assets to whomever you have named as a beneficiary. If no beneficiary is named, your loved ones may have to navigate an often lengthy and arduous court process, known as probate, to decide who receives the money.
To name a beneficiary, you’ll need to log into your broker or plan administrator’s website and enter some information about who you want to receive your assets, typically their name, date of birth, and, optionally, their Social Security number.
This process usually only takes a couple of minutes, and you probably did it quickly when you opened your accounts. Why go back and check it? Because your situation can change. And if you die before changing your beneficiary designations, the wrong people can receive your savings.
Slott cites the recent case of Jeffrey Rolison, who enrolled in Procter & Gamble’s 401(k) plan in 1987, naming his then-girlfriend Margret Losinger (née Sjostedt) as a beneficiary. The couple separated in 1989.
“Over the years, they sent him reminders: ‘We’re going digital — we’re going to send beneficiary forms online. Do you want to make a change?'” Slott says. “Over all those years, he never changed it.”
So when Rolison died in 2015, a woman he had broken up with decades earlier received about $750,000 he had saved in his account. His heirs contested the inheritance and lost.
To prevent a similar fate for your loved ones, Slott recommends updating the beneficiaries on all your accounts at least once a year. “You should also be alert when there’s what I call a life event,” she says. “A birth or a death. A marriage or a divorce. A new grandchild, a change in tax laws. These are things to consider.”
Beneficiary designations typically take the place of a will or trust, and often the brokerage firm or plan provider will handle paying the person or people you designate directly. And be sure to find a way to notify the people you designate. In the case of Fidelity, for example, “beneficiaries must contact Fidelity themselves to receive their assets,” the company’s policy says. “We will distribute your assets to your beneficiaries without the need for a will or other legal documents.”
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