Vanguard Requiring Same Beneficiary For All IRAs

Vanguard is requiring customers to have the same beneficiary noted on all their IRA accounts, and if not changed soon, the mutual fund giant will do it for them, according to Forbes.Vanguard sent out letters to 170,000 customers who had different beneficiaries on their multiple IRA accounts, stating they have to have identical beneficiaries for IRAs holding money rolled over from employer pension plans, traditional IRAs, both pretax and aftertax, and Roth IRAs.

If a customer doesn’t contact Vanguard, then Vanguard will apply the newest beneficiary form to all IRAs. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer. This is crucial for clients as it’s the form, not a person’s will, that determines who gets the money from an IRA account. 

When Forbes showed Vanguard’s letter to IRA experts, they were outraged. “This borders on unconscionable,” said Robert Keebler, a Green Bay, Wis. CPA.

“It’s crazy. I don’t see how they can change the beneficiaries on your accounts without your consent,” said Natalie Choate, a Boston lawyer.

However, Colin Kelton, the Vanguard official who signed the July letter, said customers are getting adequate advance notice and will receive a second letter next month alerting them that they need to make a beneficiary change.

There is no way customers can get around the new rule. Forbes made two customer service calls to Vanguard. “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 cost.

The other rep insisted that competitors wouldn’t allow different beneficiaries on IRAs, either. However, Fidelity and Charles Schwab said they allow clients to name different heirs on different IRA accounts. American Funds, Citibank, E-Trade, Janus Capital Group, Merrill Lynch, MFS and Wachovia, do as well.

If a client wants to invest IRA funds for different beneficiaries differently based on their own assets or taste for risk, Vanguard will still not allow that, Kelton said. That could drag Vanguard into family disputes, and curbing litigation is one reason for the policy change, he said.

The real problem is that Vanguard has allowed an account owner to name one beneficiary for a mutual fund account and a different beneficiary for an IRA account. Later, the beneficiary of a not as profitable fund or fund that went down in value, might argue that the IRA was set up when his fund had 50% of the money and that account owner really meant to leave him 50% of the whole account.

Vanguard could end up getting sued anyway by beneficiaries who were accidentally bumped by clients who never contacted Vanguard after receiving the letter, Estate lawyer Choate speculates.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.