For many divorcing couples, a retirement plan is the biggest financial asset they hold. And a Qualified Domestic Relations Order (QDRO) is used to help divide these assets. For example, it would allow a 401(k) plan administrator to make payments to the former spouse of an employee.
On the surface, that sounds simple enough. But if done incorrectly, it could make a big difference in how much your client receives.
Wild Market Fluctuations
Suppose for instance a husband’s 401(k) was worth $500,000. He and his wife agreed to split it 50/50. So in the agreement it stated that the wife was to get $250,000. Now what if by the time the agreement was implemented the stock market had skyrocketed, and the account shot up to $750,000?
The husband would still only have turn over $250,000. But if the wife got 50% as per their original intent, she’d have received $375,000. Thus she got shortchanged by $125,000.
On the other hand if the market had tanked, the husband would have had to dip into his pocket to make sure his ex received $250,000.
No Two Retirement Plans Are Alike
There are many different plans, including:
Defined benefit pension plans
Defined contribution and 401(k) plans
457 deferred compensation plans
Federal and military pension plans
State-sponsored retirement systems
Not knowing which one is involved could result in a costly mistake.
For example, if your client’s husband has a pension plan, you better understand what kind of surviving-spouse benefit she would be entitled to. Otherwise, she could be left with nothing if he dies before the pension benefits start.
Understanding cost-of-living adjustments is important, too, especially for a client with a long life expectancy. There may even be reductions in benefits once an employee is eligible for Social Security.
You might also run across non-qualified plans, such as deferred compensation plans, executive bonus plans and split-dollar life insurance plans. These plans fall outside of employee retirement income security act (ERISA) guidelines and are not subject to QDRO rules. That means your QDRO would be worthless since the administrator could only make payments to the employee … not to a former spouse.
Get the Process Started Early
The retirement plan administrator must approve the QDRO. Then it goes to the court for final approval.
The process can take two to three months. So it’s a good idea to get the ball rolling before the divorce is finalized. Ideally you’d want the court to approve the QDRO on the day the divorce is finalized.
However, as a family law attorney, you probably spend much of your efforts working out issues like custody and child support for your clients. And while you’re doing this, you might not have the time to focus on understanding QDROs as well as you want to. This can increase your exposure to liability.
Therefore, you may find it cost-effective to hire a retirement plan expert who will draft a QDRO to meet the needs of the plan that is to be divided. A qualified expert will know what details to look for in the retirement plan’s documents. And if they can find them, they’ll know what questions to ask the plan administrator.
Cary B. Stamp is a CERTIFIED FINANCIAL PLANNER® and Certified Divorce Financial Analyst®. He specializes in helping independent women make informed decisions and take charge of their financial lives. Mr. Stamp is a twenty year veteran of the financial industry and practices in Palm Beach Gardens, FL.