Consider this scenario: husband and wife happily sign the divorce decree, relieved that the divorce proceedings are finally over. The settlement agreement states, "All retirement assets will be equally divided between the parties."
Fast-forward three months. The parties jointly retain a Qualified Domestic Relations Order (QDRO) expert to draft the documents dividing up the retirement plans. Uh oh. His pension is a non-qualified plan and can't be divided. Her 401(k) has dropped in value by $50,000 -- what was the official division date? The divorce decree doesn't say. Are supplements, temporary benefits, and cost-of-living adjustments on both parties' pensions to be included or excluded? The divorce decree doesn't say.
Sadly, this is an all-too-common situation. It's common because there is much confusion in the legal community regarding pension and retirement plans in general and, more specifically, QDROs. QDROs have only been in existence since 1984. Exposure to increased liability has increased steadily amongst family-law practitioners as attorneys struggle with untangling the pension maze. This article attempts to shed some light on the most common mistakes and ways to avoid them.
Common Mistake #1
Not obtaining all necessary information on retirement plans
No two pension/retirement plans are identical. Ford's Pension Plan for Salaried Employees is radically different from Dow Chemical's Plan for Hourly Employees. GM's Stock Savings Plan is drastically different from Dr. Jones' Profit Sharing Plan. For example, some plans have early retirement buy-outs, supplements, or temporary benefits that may drop off at age 62 or 65 (when the retiree becomes eligible for Social Security benefits). Then there are some non-qualified plans that may not be divisible at all. It's crucial to have all of this information available during the negotiation process. After both parties sign on the dotted line, it's too late to start discussing whether or not supplements were intended by the parties to be included in the division. This could be a difference between receiving 50% of $4,000 per month or 50% of $2,000 per month for the alternate payee. It could also be the difference for the employee between losing 50% of $4,000 per month or 50% of $2,000 per month.
The way to avoid these types of mistakes is adequate Discovery with the plan administrator early in the case. Another solution is to involve a pension expert before it's time to draft the QDRO. An experienced QDRO drafter knows the difference between Ford's Hourly and Salaried Plan. Further, if they don't know the answers, they certainly know the questions to ask and of whom. Take advantage of their expertise and involve them in the case during the negotiation process.
Common Mistake #2
Both parties jointly retain the QDRO drafter
This is one of the most common mistakes. A QDRO is not a neutral document. It is an advocating document -- in other words, it is drafted to benefit one side -- at the expense of the other. Consider the case of Bill and Hilary. Their divorce decree states that Hilary is to receive $1,000 per month of Bill's pension. Bill is to receive the remaining benefits. Seems fairly straightforward, right?
But wait. Bill says, "Hilary is never going to receive a dime of my pension. I just won't retire!" Hilary's attorney hires the QDRO drafter, who drafts the QDRO to allow Hilary to access her $1,000 at Bill's earliest retirement age -- whether he retires or not. This is called using a Separate Interest division method. On the other hand, if Bill's attorney had hired the QDRO drafter, he would have used the other approach, which is called the Shared Benefit approach. In addition to making Hilary wait until Bill retires to receive her $1,000 per month, this method also requires that, if Hilary were to die after she begins receiving benefits, her $1,000 automatically reverts to Bill.
Volunteer to get the QDRO drafted, and ask the expert to make sure that the document advocates for your interest. Remember, there is no such thing as a neutral QDRO.
Common Mistake #3
Waiting too long to draft the QDRO
Frank and Sheryl were married for 25 years. Their divorce decree states that Sheryl is to receive 50% of Frank's pension. She is dependent upon that income to maintain her lifestyle for the next 25 years. Frank dies before the QDRO is drafted and approved. Does it matter what the divorce decree says? Technically, no. The only document that can divide up the pension plan, from the plan administrator's view, is the QDRO. Maybe Sheryl can re-open the case and have the QDRO entered nunc pro tunc. But that will likely cost her time and money in legal fees that she can't afford.
The best solution is to have the QDRO entered simultaneously with the judgment. This is not always a practical solution: sometimes it takes months for a draft QDRO to be approved by a plan administrator. Certain companies, such as GM, won't even review a draft QDRO. At the very least, the QDRO must be drafted shortly after the judgment is entered to avoid exposure to liability.
Common Mistake #4
Using the employer-provided sample QDRO
To simplify things, Kerri's attorney decides to use the sample QDRO provided by Jim's employer, Fly Automotive. Fly's sample QDRO is two pages long and doesn't address pre-retirement and post-retirement survivor benefits if Kerri were to pre-decease Jim. It also doesn't include standard language to protect Kerri, nor does it address employer-provided early-retirement supplements.
Remember, a QDRO is not a neutral document. It should benefit either the employee or the non-employee spouse. Fly Automotive's Sample QDRO benefits neither party: it benefits Fly Automotive. It is intended to streamline the approval process and make Fly's job easier when deciding whether to approve or reject a QDRO. Employer-provided sample QDROs usually don't address or explain all the possible options available to either party.
Use the sample QDRO as a guide, not a template. It gives a good indication of what the plan administrator would like to see in the QDRO. For example, some plans require you to use the word "supplement" instead of "subsidy". If you use the wrong word, your QDRO will be rejected. This is the type of information that the sample is best used for.
The Last Word
The most important mistake to avoid is thinking that if the pension issue is ignored, it will go away. A highly competent and well-respected attorney once said, "I don't want to deal with QDRO issues -- it's too much liability. I tell my clients that they need to hire the QDRO expert on their own after the divorce is over." This is a dangerous attitude for attorneys to take. Yes, this area is technical and complicated, but ignoring these issues doesn't make them disappear -- it just makes them worse. Involve an expert early on in the case. Ask many questions and have them lend their knowledge and expertise in time to help. These issues need to be addressed during the negotiation process in order to protect you from losing pension money down the road.
This article has been contributed by the Institute for Certified Divorce Financial Analysts (IDFA). For more information about how a Certified Divorce Financial Analyst can help you with the financial aspects of your divorce, call (800) 875-1760, or visit their website at www.InstituteDFA.com.