If you’re a woman who is going through a divorce, and you and your advisors are negotiating the division of your and your spouse’s marital assets, one challenge you will face is dividing retirement plans in divorce.
To address three of the most common mistakes made when dividing retirement plan assets in a divorce, I’ve invited my friend and colleague, Howard Phillips, to share his unique expertise on this important topic.
Here’s Howard . . .
The first or second largest asset in a marital estate is one or both spouses’ retirement plans. Therefore, a mistake made in dividing these assets in a divorce could be very costly for one of the spouses.
An Ambiguous Property Settlement Agreement (PSA)
The PSA sets forth the agreement between the parties with regard to each of the assets in the marital estate. If the PSA provision in connection with retirement plan benefits/accounts is not specific, the implementation of that provision may not result in what was meant by the provision. For example, if the provision states that the non-retirement plan participant spouse gets 50% of the participant’s spouse benefit/account, the interpretation could be
- 50% of the benefit/account accrued as of the date of the complaint.
- 50% of the benefit/account in place when the participant spouse is paid the benefit/account.
- 50% of the benefit/account that could be traced as accruing during the marriage, knowing that a portion of the benefit/account came with the participant spouse into the marriage.
Each of these interpretations can produce vastly different results.
Handling The Situation Where A Participant Spouse Came To the Marriage With A Retirement Benefit/Account
If the non-participant spouse, or her advisors, is not aware of the different methods of properly reflecting that pre-marital benefit/account, the selection of method could be less equitable for the non-participant spouse. For example, one or more of the methods available to reflect that pre-marital asset will deliver a share of the investment gains earned during the marriage by the pre-marital benefit/account to the non-participant spouse. If such a method is not set forth in the PSA, or the Qualified Domestic Relations Order (QDRO) {an Order from the Court stipulating as to how and when retirement plan assets are divided in a divorce}, the non-participant spouse will get less than an equitable share.
Selecting The Time To Receive A Share Of The Benefit/Account
If the participant spouse has earned a retirement benefit payable at some future retirement date, the non-participant spouse, or her advisors, should test to determine if the sharing should be done now (at the time of the complaint), or at that future retirement date. It is not unusual to find that State Law will allow for sharing the benefit in the future. More importantly, the portion of that future benefit (which will be larger than it is now as a result of increased compensation and service in the benefit formula), pro-rated for the portion of that benefit earned during the marriage, may be larger than the portion of the benefit to be shared now (at the time of the complaint).
These and other important retirement plan division methods and information are set forth in a newly published concise and comprehensive guide—“Dividing Retirement Plan Assets In A Divorce”—which is easily accessible at www.divorcepensionrights.com
SPECIAL NOTE: One typical result of sharing retirement plan benefits/accounts is the delivery of a fund of significant size, more likely than not to be rolled over to an IRA. As the recipient, in most cases, is one unfamiliar with financial planning, that recipient will need to connect with a financial planning professional to assist in the investment management of that retirement plan distribution.
Howard Phillips is a pension actuary. He is a past president of Consulting Actuaries Incorporated and a past president of The American Society of Pension Professionals and Actuaries (ASPPA). Phillips has earned a Fellowship in the Society of Actuaries; a Fellowship in the Conference of Consulting Actuaries; is a member, and past Board member, of the American Academy of Actuaries and ASPPA; and he is enrolled to practice by a Joint Board of the Departments of Labor and Treasury. He is the author of “Dividing Retirement Plan Assets In A Divorce”.
I’d like to thank Howard for sharing this information with us and invite you to contact me directly if you have any questions or if you’d like me to introduce you to Howard.
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