Often, a spouse’s retirement plan account must be divided in divorce. Pensions are much more complicated to divide, and that is a subject for another article. 401(k) type plans are easier to divide because you are dividing an account balance, which is much easier to define. Even so, along with this division comes extra expenses, time and complications. The following must be thought about and addressed when a plan participant account will be divided between spouses:

  1. When dividing a 401(k) type plan account, a court order will be necessary. In the private sector these are referred to as a QDRO (qualified domestic relations order). When it comes to the government TSP (Thrift Savings Plan), the military refers to this order as a “Retirement Benefits Court Order” and the Feds refer to the order as a “Court Order Available for Processing.” Getting the name right is just the first hurdle!!!!

    1. These orders, in many states, can only be prepared by an attorney or an attorney service. That means extra expense.

    2. It is best to get a QDRO is pre-approved by the Plan Administrator before a final order is presented to a judge. That requires an extra step (and you guessed it, extra time and expense.)

    3. If a court hearing is required so the judge can approve the QDRO, you might need an attorney to help with that process. However, if you are not intimidated by the process, you might find you can handle this yourself.

    4. They cannot be processed for payment by the Plan Administrator without an actual Divorce Decree. This can mean months of delay.

  2. There is market risk associated with these plan accounts.

    1. If a flat dollar amount is assigned to the non-participant spouse, that spouse could lose potential gains if there is a stock market gain between the time of assignment and the time of distribution. Conversely, the plan participant could lose if there is a market loss between the time of assignment and the time of distribution because that spouse bears all the stock market risk.

    2. A fairer way to divide the account so that both parties bear stock market risk and reward is to direct the Plan Administrator to add gains (or subtract losses) from the time of assignment to the time of distribution. Most Plan Administrators will do this calculation but some will require that an outside party prepare the calculation.

  3. If there is a plan loan, the plan participant will be paying back that loan through payroll deductions. Care should be taken when writing the agreement to divide the account to take into consideration any outstanding loans.
  4. As discussed above, QDROs are costly and it should be set out who will bear the costs related to the order. Some Plan Administrators provide a form QDRO, which can help reduce costs and speed up the process. Fidelity, as an example, charges a $800 fee to review their form QDRO and this expense can usually be paid out of the account. Be aware that there may also be attorney fees relating to getting the QDRO processed all the way from creation, pre-approval by the Plan Administrator, approval by the judge and then submission to the Plan Administrator after the divorce is final. Those expenses cannot be paid out of the plan account.
  5. A big error is not allocating fairly between the ROTH (tax free) portion of the 401(k) account and the taxable portion of the account. Specific language to that effect needs to be clearly written.

  6. Who is responsible for getting the QDRO prepared? This needs to be written in the separation and property settlement agreement/divorce decree. There should also be a written deadline.
  7. The language in the separation and property settlement agreement/divorce decree and the QDRO must match!!! Attempts to put in a QDRO correcting language or address an omission will not, at least should not, be approved by a Plan Administrator.
  8. Failing to implement the QDRO is the worst mistake of all. Often the spouses are so overwhelmed with and tired of the divorce process, they forget to follow through with one or more of the above steps. If either spouse dies before the QDRO is on file with the Plan Administrator, sometimes nothing can be done to get these funds, or it can get very complicated.

Not only am I a Certified Divorce Financial Analyst who has had training on the division of retirement accounts in divorce, but I also was an employee benefits (ERISA) paralegal for the first 12 years of my career during which time I became a Qualified Pension Administrator and a Certified Pension Consultant. I have also spent countless hours learning about the division of military retirement benefits. I understand the complications related to dividing these accounts. The language in the mediation summary, the separation and property settlement agreement and the QDRO should not be prepared by anyone not well versed in the nuances of dividing retirement accounts.