Don’t Leave Your Retirement Plan at Risk: The Importance of Power of Attorney Reviews
AUGUST 3, 2021
A power of attorney (POA) is a formal written grant of authority, governed by state law, from an individual to their agent, allowing the agent to act on the individual’s behalf in financial or other matters. Retirement plan fiduciaries need to have an established POA compliance review process, because the failure to appropriately determine the validity of a POA leaves plans at risk.
A POA can be a general grant of authority, or it can be limited in scope, such as a POA for the purpose of transferring a vehicle. Plan administrators commonly see general POAs and must decide, for instance, if the agent’s completion of a loan application or benefit election form is authorized by the POA.
Why Determining a POA’s Validity Is Important
For example, a substantial plan loan is issued to a plan participant under what’s assumed to be a valid POA from one of the participant’s sons, who the plan administrator knows is named on the participant’s designated beneficiary form. The administrator assumes the POA must be valid, because the participant’s son is named as a beneficiary.
However, when the participant dies, the primary beneficiary — the participant’s other son — informs the plan administrator that the loan proceeds were actually paid to his brother, a contingent beneficiary, under an invalid POA. The plan sponsor is now obligated to ensure the restoration of the misdirected funds (plus interest) to the participant’s account for distribution to the rightful beneficiary.
Where to Start
When it comes to determining the validity and effectiveness of a POA, it’s important to get it right. Assessing a POA can be a labor-intensive task under arcane law, or it can be remarkably simple. Fortunately, the legislative trend favors more streamlined administration of POAs submitted to a plan.
In the U.S., there are currently 29 states that have enacted the federal Uniform Power of Attorney Act, as compared to just 26 states in 2018. One more state and the District of Columbia have introduced the Act.
It’s expected that more states will follow the Act over time, easing the burden of analyzing POAs based on each state’s applicable governing law. Plan administrators may be able to adopt a checklist of the Act’s requirements for a valid POA. For now, plan administrators face various POA forms — even from states that have adopted the Act. Many POAs were executed prior to a state’s adoption of the Act, subjecting its review to pre-Act state law.
After determining the effective date of a POA and the governing state law, the plan administrator needs to determine if the requirements for a valid POA have been met. These requirements may include, for example, witnesses and/or notarization. If notarization is required, the state’s notary laws must then be analyzed to determine if the notarization is valid. Even where notarization is not required, notarization of a POA should be reviewed for its compliance with state law.
If the POA’s form is determined to be valid, the more difficult determination is often whether the agent’s act is authorized by the POA. At best, the POA authorizes any and all actions with respect to the specific retirement plan and the participant’s benefits at issue. However, that is rare. More often, a plan administrator must look at the specific areas of agency:
- Does the POA intend to encompass any and all acts that the participant could perform when compared to the listed matters?
- Does the POA include a reference to private retirement benefits?
- Is an agent’s request to change a beneficiary under a POA, or to waive a survivor benefit of a non-participant spouse, provided for explicitly in the POA?
Plan administrators’ assessments of these questions generally fall on a spectrum. One administrator may be comfortable to read between the lines that the requested agency is authorized by a POA encompassing all financial matters, while another plan sponsor’s risk tolerance will only approve a POA that lists retirement matters specifically and comprehensively.