Large 401(k) Plan, with participants in virtually all states.

Plan document says that in event of failure of beneficiary designation, the account goes to

1. spouse
2. children, per stirpes
3. parents
4. siblings
5. estate

And ERISA council (who drafted plan) says that is best practice, because it avoids probate on the estate.

Recordkeeper on the other hand says that the best practice is

1. spouse
2. estate

Because of the administrative burden of being sure (for example) that the son who submits a claim for benefits is the only child of the participant.

So who do I believe?

How do you know that someone is the spouse of the deceased employee at the time of death? You have that person prove it by a statement signed by them, and perhaps a marriage certificate. But there could have been an intervening divorce. In the end, you are relying on what the person claiming to be the spouse signs to that effect, and plan officials not knowing any facts to the contrary.

I would agree with the ERISA counsel you have drafting the plan (but then, hey, I am lawyer too, and just watching the back of another Bar member ). Seriously, I do agree with the ERISA counsel. I would suggest that you (and the recordkeeper) take a look at the U.S. Supreme Court's decision of January 26, 2009 in Kennedy v Plan Administrator for DuPont Savings and Investment Plan. If the plan has a procedure for requiring that the son applying for the death benefits verifies that he is the only child of the deceased employee, then that ought to be sufficient if the plan officials have no reason to know of other children.

If it is not, then even elevating the estate ahead of a 'spouse' would follow from the same logic.

I thought that designating the estate could have the undesireable consequence of exposing the account to the decedent's creditors. So by having a default that is approximately the same as most states, then you have nearly same effect but bypass the creditors.

The DuPont case that John mentions reminds me of a plan change we added at my last employer... a provision that beneficiary designations become void in event of a divorce (so if the EE really wants the ex to get money, then have to submit a new designation after the divorce). Something to think about anyway.

Regardless of which order you or the recordkeeper believes is the "best practice" you are obliged to follow the terms of the document. So unless you are contemplating amending the document, the best practice argument is irrelevant.

We would of course amend the plan if we decided it was prudent to change the process.

Sometimes there is no right answer - I would generally prefer to have more defaults and try to avoid sending money to the estate, but on the other hand with a large plan you might not want the burden of potentially sifting through various levels of default beneficiaries, as noted. Neither is right or wrong.