Financial Planning

The will has no bearing on the beneficiaries.  Vanguard had eleven individuals named as beneficiaries on two of my sisters Vanguard IRA accounts, names provided by my sister.  [She had sent me a list late June 2007 showing all her beneficviraies.]  Vanguard had a "System change", "simplifing" ones beneficiary list., sending hard to understand form letters to IRA holders telling what Vanguard was going to do.  This occured last Sept. & Oct., letters that could be overlooked very easily.  Hope that is clear and you read the article from another party that was in a Sept. 2007 issue of Forbes.  It was titled "Disinherited by Vanguard, time to move your IRA".

You are correct about the MDS, though uncurable as of now, it progressed to cancer and other life ending diseases.  [Not explained correctly].   Thanks for caring and sharing.  Wishing you well.

Ronald "Bud" Meyer

Ronald,

How do the beneficiary designations of these Vanguard funds read?  You seem to be suggesting that eleven family members were originally named as beneficiaries, but that your sister changed that, naming two individuals who were not in the original group.  Is that accurate?

You claim that this change did not represent here wishes.  How do you know that?

If you believe that the two new beneficiaries exerted "undue influence" to persuade your sister to name them as beneficiaries, you should contact an attorney experienced in this area.

Not incidentally, it does not matter what your sister's Will says, unless the beneficiary named on the Vanguard funds is her estate (or if there is no valid beneficiary designated).  The money in an account having a beneficiary designation (e.g.: mutual fund account, insurance policy, annuity contract) passes in accordance with that beneficiary designation.  The account owner's will (or intestacy law of her state, if she had no will) has no control over this money.

- John Olsen

John,

Your 1st paragraph is partially correct.  The beneficiaries were changed by Vanguard last October through a "System change", not by my sister.  170,000 Vanguard clients received two form letters telling the IRA holder how this would "Simplify your beneficiary designations".   Form letters, which were hard to understand.

My sister late last June, 2007, sent me her "Beneficiary designation" list for several funds.  On the Vanguard funds the original eleven beneficiariers were deleted by Vanguard, two different ones were named to replace the original eleven.  The letters were misleading [hope you can read the Forbes article], the type one may easily misunderstand, even if in good health.

I and one of the beneficiaries, my niece, are co-executors.  She was one of the two new beneficiaries shown by Vanguard, she also stated, several times similar to, "That was not Aunt Mickis wishes to change beneficiaries."   Believe we will need an attorney, I've written to the SEC and waiting for a reply from them.  Vanguards "sysrtem change" will catch 1000's off guard.  Thanks much for your input.  Hope you understan the above.


Ronald "Bud" Meyer

I saw an article about something like this on Forbes.com  I will try and paste the article here.  Forgive the formatting as it is pasted and I am not going to take the time to go through and fix it.  

Money & Investing
Disinherited by Vanguard
Ashlea Ebeling 09.03.07

Is it time to move your IRA? In late July the Vanguard group sent 170,000 customers a form letter innocuously labeled: "Change in beneficiary policy will help you simplify your planning." A more candid heading would have been: "Warning! Unless you act, we're about to change who gets your Individual Retirement Accounts when you die."

Vanguard has decided that, as of mid-September, it will require customers to use identical beneficiaries for all IRAs of the same type. All your IRAs holding money rolled from employer pension plans count as the same type and must have the same beneficiaries. Traditional IRAs, both pretax and aftertax, are a second type. Roth IRAs are a third. If you're one of 170,000 customers who now have different beneficiaries named for separate IRAs of the same type or different beneficiaries for different mutual funds within a single IRA, Vanguard will apply the newest beneficiary form to all your IRAs of one type--unless you contact Vanguard and direct otherwise. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer. This is crucial, since it's the form--not your will--that determines who gets your IRAs.

Say you've named your older child primary beneficiary of one rollover IRA and your younger child primary beneficiary of another. If you don't read your mail carefully, or were on vacation or in the hospital when the letter came, and you die without contacting Vanguard, one of your kids could be done out of his IRA inheritance. When FORBES showed Vanguard's letter to IRA experts, they were outraged. "This borders on the unconscionable," fumed Green Bay, Wis. CPA Robert Keebler. "It's crazy. I don't see how they can change the beneficiaries on your accounts without your consent,'' said Boston lawyer Natalie Choate.

Colin Kelton, the Vanguard official who signed the July letter, argues customers are getting adequate advance notice and will get a second letter in September alerting them that the beneficiary change has been made. What if clients pick up the phone and ask to keep different beneficiaries for separate IRAs of the same type? In two customer service calls FORBES was told that's impossible. "There's no way to override the computer,'' declared one rep. He added that Vanguard is "a low-cost provider" and permitting different beneficiaries would increase its costs.

The other rep insisted that Vanguard's competitors wouldn't allow it either. Not so. Fidelity and Charles Schwab, which hold the most IRA assets, said clients can name different heirs for different accounts of the same type. So did American Funds, Citibank, E-Trade, Janus, Merrill Lynch, MFS and Wachovia. Of those we surveyed, only T. Rowe Price doesn't allow it. Kelton said that Vanguard might make an exception if a customer could show different beneficiaries were needed. But he couldn't think of any examples where they would be, and those we offered--all cases where lawyers advise it--didn't qualify, he said. What if you want to leave one IRA to charity and one to your kids or one to your kids from your first marriage and one to your current spouse? Kelton says a customer should indicate on the form the percentage each heir is to get and the executor of his estate can split the IRA up.

The Internal Revenue Service has allowed such postmortem IRA splits since 2002. But the executor must meet strict deadlines. If, for example, an IRA going partly to charity isn't split in time, other heirs lose the ability to stretch out payouts and tax deferral over their own lives. So many advisers recommend establishing separate IRAs for separate beneficiaries before your death. "That way, it can't get goofed up," says Keebler. Stephanie Rapkin, a Mequon, Wis. estate lawyer, was leaving one Vanguard IRA to charity and another to her family. Now she plans to move them both from Vanguard.

What if you want to invest IRA funds for different beneficiaries differently, based on their own assets or taste for risk? Will Vanguard allow different beneficiary forms in that case? No, says Kelton, because it could drag Vanguard into family disputes, and curbing litigation is one reason it's changing its policy.

The real problem is that Vanguard has allowed an account owner to name one beneficiary for one mutual fund and a different beneficiary for another fund within a single IRA. Later, the beneficiary of a dud fund might argue that when the IRA was set up, his fund had 50% of the money and that the account owner really meant to leave him 50% of the whole account. But that's not a problem with separate beneficiaries for separate accounts.

Forbes.com - Magazine Article http://members.forbes.com/forbes/2007/0903/068_print.html
2 of 2 2/28/08 4:17 PM

Estate lawyer Choate speculates that Vanguard could end up getting sued anyway--by beneficiaries who were accidentally bumped.

Thanks for forwarding, hope others see this.  I have been aware of this, so is Vanguard, they appear to care less.  And there apparently will be lawsuits.  Thanks again.

Ronald "Bud" Meyer

This is absolutely NUTS!

Years ago, Fidelity pulled the same stunt, citing the same "need" (to suit their "systems").  It got a LOT of VERY bad press (all deserved), to the point where Fidelity reversed its policy.  I was not aware of this problem, and I'm grateful for hearing of it.

THIS MUST NOT BE TOLERATED!   If Vanguard's systems can't handle the needs of individual clients, then it needs to change the systems. 

I've used Vanguard funds for a number of accounts (but none, that I can think of, had the kind of beneficiary differences that apparently trigger this outrageous action by Vanguard), and I'm going to be sure that those account holders understand what the heck Vanguard is pulling.  I may never use a Vanguard fund again.

- John Olsen

John,

You are totally correct.  If you haven't read the Forbes article about this login to www.rothira.com.  Scroll down to "Disinherited" etc.  To date we are totally being ignored.  I have the copy of their two letters sent 170,000 Vanguard clients.  The 1st one stated "We are going to simplify your plan", then "Will change to a single beneficiary", then "Your latest beneficiary list is the one that will be used".  [Or very similar to those words].  A "form" letter that many people neglect.  If read, one would be confused or probably not even understand it.   What does "Your latest beneficiary designstion is the one that applies" mean?  And "single" is how many?  Then they changed it to two. 

Many of my sisters less fortunate nieces and nephews, [8] have been deleted by Vanguards change.  She wanted to help out the less fortunate.  She left our children out as beneficiaries for they were "better off", had spoken to me about it and I agreed with her, no problem.  But Vanguards change is a total disaster, and many others will find out in the future, unfortunately, if it is not corrected.  Thanks much for your thoughts.

Bud Meyer

Bud,

I did read the Forbes article, and you're right - it seems that Vanguard is not interested in fixing their unconscionable goof.  Check out http://articles.lancasteronline.com/local/4/225365

I plan to mention this issue in every speaking engagement (and I do more than a few of them) until it's resolved.  We need to HOLLER - LOUDLY! - until Vanguard recognizes that it's WAY out of line.

John Olsen

John, while you're at it can you holler as well about them not providing documentation for specific-ID sales? This one baffles me. The IRS clearly states that you need a contemporaneous written acknowledgement from your broker to make use of specific-ID (usually something as simple as "VS 2/13/2004" noted on the trade ticket). Every brokerage firm I've had to deal with has some mechanism for doing that...except Vanguard. So an investor who custodies at Vanguard risks a run-in with a punctilious revenue agent who forces FIFO because of lack of proper documentation of Specific ID sales.

And given that, I don't know, 90%? of tax management of a long-term taxable mutual fund account is based on Specific ID sales, this is kind of significant! I'm at an impasse on that with a current client with ETFs at Vanguard, where there's a lot of ability to realize what would otherwise be paper losses (that will, we assume, vanish over the multi-decade time frame for this account). But none of these sales will be properly documented. If it were a managed account I can do it in my trading platform - in effect, another service to offer. Good for business, but bad for Vanguard clients.

-Tad

Tad Borek wrote:

"And given that, I don't know, 90%? of tax management of a long-term taxable mutual fund account is based on Specific ID sales, this is kind of significant! I'm at an impasse on that with a current client with ETFs at Vanguard, where there's a lot of ability to realize what would otherwise be paper losses (that will, we assume, vanish over the multi-decade time frame for this account). But none of these sales will be properly documented. If it were a managed account I can do it in my trading platform - in effect, another service to offer. Good for business, but bad for Vanguard clients."

Tad, Vanguard ETFs trade through brokerage accounts, so I'm not sure what Vanguard's tax documentation has to do with anything.  Even a Vanguard Brokerage account is custodied and administered by Pershing.  Seems your tax issues with them would only apply to directly-held open-end funds.

- DDB

DDB, Vanguard was the broker and while Pershing's platform may allow for it, Vanguard didn't have a method of sending the specific-ID note to a trade confirmation or other document. Update though - recent sales I'm aware of allowed for it so it was either bad info last time, change of procedure, or possibly different service levels depending on account size - I'm not sure. But at the time of this thread, definitely had hit a roadblock.

-Tad

John,

Thanks so much for your input and the article that we didn't have.  As you say, it needs to spread like a wildfire.  Many people will be devasted if not further broadcast.  Seems important enough for a "60 Minutes" or "20-20" report.  Thanks again. 

Bud Meyer

Dear Mr. Meyer,

I am sorry to see that this has happened to your family.

There is a saying in the financial services business "LOW cost does not equal NO cost". In this case, this is the highest possible cost to the beneficiaries.  Not to mention what this has cost your family in emotional stress.

What has happened to you and your family was reviewed at our semi-annual training by Mr. Ed Slott at the Elite IRA Conference. Our firm quickly sent letters to all direct Vanguard account holders recommending an immediate change of custodians. You can still use a Vanguard fund, just use a different custodian to house the funds and this improper inheritance issue can be eliminated.

[solicitation removed by moderator]

Best wishes,

Steven G. Johnson,

Ed Slott Elite IRA Advisor

Steven,

Thanks for your thoughts and recommendations.  Will follow up.  This has been an extremely stressful situation.  And thinking that others may possibly be affected in the future is also very disturbing.

Sincerely,

Ronald "Bud" Meyer

I just got off the phone with a Vanguard IRA specialist.  He confirmed that Vanguard has, indeed, adopted a policy that all IRAs of the same type (rollover, non-rollover traditional, Roth) for the same holder, MUST have the same beneficiaries, and that if a holder has more than one IRA account of the same type, Vanguard will change the beneficiaries designation so that they're the same.  Beneficiaries of the most recently-processed designation will,evidently win the great Vanguard IRA lottery and become beneficiaries of IRAs originally intended to pass to others.

This guy actually said to me that he doesn't see why anyone would "need to have all that complication" (different beneficiaries for different IRA accounts).  "Why would they want to do that?", he asked me.

"Because it's THEIR money?", I responded.

I am FURIOUS at this arrogant, high-handed attitude.  It seems that, if there is a conflict between what how a Vanguard client wants his money to pass and what Vanguard's IT department says is most convenient for their "systems", the client loses.

I MAY continue to use Vanguard funds and ETFs where the Custodian is someone other than Vanguard, but I will never again recommend that anyone establish an IRA with Vanguard, using Vanguard as the Custodian.  And I'm actively looking at alternatives for low-cost funds and ETFs, because if Vanguard can be this insensitve and arrogant about beneficiary designations, I have to wonder what other "trade-offs" between the welfare of its customers and its own convenience that it may decide are appropriate.

- John Olsen

We typically do not comment directly on client issues for privacy and other reasons. That said, we can confirm that we have been in contact with co-executors of the shareholder's estate and are working toward resolving the issue.

We are concerned about the impression that Vanguard is insensitive to the concerns of Vanguard fund shareholders.  Contrary to the statements on the Financial Planning online bulletin board, we do not ignore complaints and, in fact, as explained above, have not ignored the one raised there.  We also are sensitive to the estate planning needs of our clients.  For many years, we have provided a service to meet the estate planning needs of eligible clients, and we frequently work with shareholders, as well as financial advisors and planners, regarding complex beneficiary designations.  

We welcome the opportunity to clear the air regarding Vanguard's IRA beneficiary initiative and correct some erroneous reporting in the news media. In July 2007, Vanguard sent a one-page letter to a very small percentage of IRA holders to inform them of a new plan-level designation standard. The vast majority of our IRA clients already had designated beneficiaries at the plan level, meaning that one set of beneficiaries were designated for Roth IRA (regardless of the number of underlying funds), one set of beneficiaries for a traditional IRA, etc.  Many of the clients who received the letter had designated multiple beneficiaries at the fund level, so within a Roth account, he or she designated beneficiaries for a Windsor Fund account, different beneficiaries for a 500 Fund account, etc. Our goal was simplification, aligning beneficiary records to IRA types, which is more in line with industry standards (contrary to the assertion in past articles on this issue). Also contrary to published reports, our standards do not preclude shareholders from naming charities as beneficiaries.

The letter is clear and straightforward.  It encourages clients in boldface type to check the accompanying designations carefully and to call us if they had any changes. (Alternatively, beneficiaries can be changed or updated at any time on Vanguard.com.) We followed up in September 2007 with a notification regarding the new beneficiary designations, which again provided clients the opportunity to change or update their beneficiary designations. Finally, every client is sent--every year--a beneficiary verification form on or around his or her birthday.

In addition to the personal letters, our communications efforts included publishing stories in our quarterly shareholder newsletter and on Vanguard.com regarding the importance of checking and verifying IRA beneficiaries (see link below).

Do you know who will inherit your retirement nest egg?

Sincerely,

John Woerth
Principal, Public Relations
The Vanguard Group

Mr. Woerth,

I am a co-executor.  So far questions to Vanguard have been mostly evaded, and your service a little less than nothing.  Your firm is trying to take many dollars from the rightful beneficiaries [at least as of this date], and place those dollars into a single beneficiary consisting of two people.  Math has changed since I went to school,  Your firm has the list of intended beneficiaries.  Use it.  And your letter was anything but "clear and straight forward" to an average individual, let alone someone in ill health. 

Sincerely,

Ronald Meyer

Mr. Woerth,

I've read the letters.  They are anything but "clear and straightforward".  But if they were, they'd read about as follows:

"Our systems people tell us that it would be easier for us if you designated beneficiaries more simply, so if you don't change them to suit our systems, we will". 

That you include a hyperlink saying Do you know who will inherit your retirement nest egg? is almost laughable - considering that an accurate answer would be  "Not if Vanguard is my Custodian".

John Olsen

John,

Thanks again for your e-mail.  "Form" letters are easily ignored by the "masses".  Had their letter stated similar to "All your previous beneficiaries are being replaced" [then name them] in bold letters, something that would cause concern, I would understand.  A layman, especially ill, but rather sick or not, could have easily overlooked what Vanguard sent.  How simple it would have been for them to place a warning, perhaps on the outside of the envelope, "We are going to change your beneficiaries unless you act now."  They appear to have deliberately minimized their message to receive as little return response as possible.  How could any company take $200-300,000.00 away from intended beneficiaries and defend that as justifying a clients wishes? 

Bud Meyer

Boy this raises quite a few legal questions. It sounds like you have written evidence of your sister's desired beneficiaries as of June 2007 so that fixes her intent at that point in time. A subsequent conversation (date uncertain) confirmed this.

Vanguard sent a change in September 2007, raising questions like

* can a plan administrator unilaterally change beneficiaries in this manner, or is that entire change itself invalid for all 170,000+ account owners?

* if such a change could be made, what notice of the change was required?

* did the notice provided meet the requirement?

* would the capacity of the account owner affect the validity of the administrator's change

Certainly looks like an issue that goes well beyond self-help...suggest consulting a local attorney well versed in the laws of IRAs.

That said, the way Vanguard handles IRAs seems the right way to do it -- with beneficiaries named per-IRA-account rather than per-fund. Obviously in a brokerage account you don't link beneficiaries to individual investments, rather it's done at the account level. But you still need flexibility to open multiple (e.g.) Roths with different beneficiaries for each. And the notion of unilaterally changing beneficiaries -- other than the routine cases such as "plan specifies default beneficiary if none is named" - is very strange and I wonder if it is legally valid. I also wonder if the answer varies by state.

The ideal test case on this would be an individual who was, let's say, in a coma starting the day before that Vanguard letter was sent, with no guardianship, POA, etc. established, who passed away shortly thereafter. Then you'd isolate the question of whether an IRA administrator has the power to change beneficiaries even when it's impossible for the account owner to receive actual notice of the change. Left unresolved though, this could require a PLR.

-Tad

Tad,

  Thanks for your comments.  Some of your letter I don't understand.  Like many of those that received  the computer generated hard to understand letters from Vanguard.  My understanding from a Sept. 2007 Forbes article, the letter was sent to 170,000 Vanguard clients.  Will it affect all of them?  Most certainly, no.  But many are due for a severe jolt.  The reason, the letters were not clear for a lay person to understand.  It would have been extremely easy for Vanguard [or anyone else] to send something that would "jump out" at you, and make one realize a change was going to be made that was not your intentions.  Wish I could explain clearer. 

  Vanguard may handle IRA's the right way, but they totally wronged many of their IRA clients as far as their beneficiary "system" change.  Once again, "single" is how many? You say one, wrong according to Vanguard, it is two.   Vanguard wrote "Your latest beneficiary designation is the one that applies."   Now would you assume, as an IRA holder, that the latest beneficiary list that you sent  applies?  If you said yes, wrong again.  Vanguard changed your "latest beneficiary list."   That's OK with you?   A Harvard graduate who mastered in economics probably would have understood the letter.  An average person would have a problem.  I'm average, I don't understand several of your comments, and I read them. We don't even know if the subject of this article did same.  Thanks again for your input, maybe someone more knowledgeable will provide clarity.

Bud Meyer

P. S.  What is a PLR?

Bud, I'm not clear from your reply whether you're in the financial business (I thought I've seen you post on these boards before). We professionals reading this thread have learned something about Vanguard's policies, and it's all a good reminder about how important it is to review beneficiary designations regularly, and keep an eye on plan changes.

But these boards aren't meant for getting financial planning or legal advice, or answers to complicated questions like the ones your scenario raises...whether you're in the business or not, I really suggest you consult with an attorney if you aren't able to clear it up promptly with Vanguard. Perhaps this discussion will be helpful for presenting the narrative, but I'm seeing issues that require legal research to answer, and perhaps litigation to resolve.

-Tad

PS PLR = private letter ruling, a process by which you can get a specific tax question answered by the IRS. Though yours might not be a PLR kind of issue, as the goal is to force Vanguard to reverse these beneficiary changes.

Tad,

Thank you.  I'm retired for several years.  My wife and I have beneficiaries named for our estate and holdings, I doubt very much if our children, or we, look at what we sent them years ago.  The same as ones bank, stock, mutual fund, and any account.  Most people believe that what they wrote, beneficiaries listed, remains in effect unless they persoally change them.  But when your bank, fund company, or other entity changes your beneficiaries without your written request utilizing a form letter that could easily be neglected, that appears to me a disgrace.

Bud M

fyi, here are copies of the original letters received from Vanguard:

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