When Dividing Retirement Accounts in Divorce the Division Date Issues
There are a number of questions that need to be answered when splitting a retirement account in the event of a divorce. Often divorced couples focus specifically on the amount or percentage of account balances they share. However, it is also important to find out the date of this department and determine whether or not it includes investment changes. This information is necessary because splitting a retirement account is not as instantaneous as splitting a liquid asset.
Splitting a retirement account in the event of a divorce requires a special court order (usually called a Qualified Domestic Relationship Order or QDRO). The process for obtaining and executing any of these orders is not immediate and requires approval from both the court and the plan administrator. During this time the account changes value. Changes in the value of accounts due to market fluctuations, but also due to withdrawals, loans and current contributions. All of these changes can create chaos for a division if a clear date is not set for the division.
Just look at this simple splitting example:
Pat and Chris agree to share Pats 401 (k) with Chris receiving 50%.
They do not give the date of the division, but they sign their agreement on January 2, 2019. Due to the deadlines for the divorce process in Massachusetts, their hearing for a joint petition for divorce is February 4, 2019. Their judgment on the divorce Nisi issues is on March 6, 2019 and will become final on June 4, 2019 (your legal date of divorce). They have just hired their QDRO writer (on April 1st, 2019) and estimate that the time from QDRO draft start to implementation will be approximately 4 months (for draft, pre-approval, judicial approval, final approval and the implementation). with an estimated money transfer on August 1, 2019.
The following are the changing values in the 401 (k)
January 2, 2019: $ 400,000
February 4, 2019: USD 410,000 (from 1/2/19 posts of USD 1,000, approx. USD 9,000 investment gain)
March 6, 2019: USD 425,000 (from 1/2/19 posts of USD 2,000, approx. Investment gain of USD 23,000)
June 4, 2019: USD 436,000 (from 1/2/19 posts of USD 10,000, approx. Investment gain of USD 26,000)
August 1, 2019: USD 438,000 (from 1/2/19 posts of USD 14,000, approx. USD 24,000 investment gain)
Pat continued to contribute to the account and investments spiked in the spring, but there were some losses in investments in July. Now consider the different distribution of funds on August 1, 2019, depending on which distribution date is chosen:
|Date of assessment||Including investment changes||Without investment changes|
|Pat keeps||Chris receives||Pat keeps||Chris receives|
|Date of agreement (January 2, 2019)||$ 226,000||$ 212,000||$ 238,000||$ 200,000|
|Date of the hearing (February 4, 2019)||$ 225,500||$ 212,500||$ 233,000||$ 205,000|
|Divorce decree Nisi (March 6, 2019)||$ 226,000||$ 213,000||$ 225,500||$ 212,500|
|Judgment on Absolute Divorce (June 4, 2019)||$ 221,000||$ 217,000||$ 220,000||$ 218,000|
|Transfer date (August 1, 2019)||$ 219,000||$ 219,000||$ 219,000||$ 219,000|
* I’ve used round numbers for demonstration purposes, but there would be some additional differences due to investment gains or losses in contributions made between January 1, 2019 and August 1, 2019, and this would change these numbers slightly as well.
In this example, Chris gets more from the account if all contributions are included (a later distribution date) and in most cases a higher resulting amount if investment gains are also included (except when using June 4, 2019 due to the decline in investment values in July). A later evaluation date is obviously better for Chris, but is it fair?
Pat may not believe that it is fair to split the posts after a certain period of time, and Pat’s risk will only increase if the QDRO process is delayed for some reason and the transfer date is later than August 1, 2019 lies. What’s fair is always subjective, and one of the benefits of having a set evaluation date (regardless of the date) is that it motivates Chris to delay the QDRO process.
In dividing investment profits, Pat and Chris share the same risks and benefits of a growing or declining market. For these reasons, most divorced couples choose to share the investment gains and losses and set a specific valuation date. In some cases there may be reasons to deviate from the typical ones. However, it is important that everyone understands these risks and benefits so that they can make an informed decision.
As QDRO preparation experts and consultants, the staff at Gray Jay Endeavours, LLC want their clients to provide clear instructions on how to prepare the QDRO, preferably in their divorce settlement itself, so that there is no possibility of later disagreement if the market or the QDRO changes is delayed due to unforeseen circumstances. Many experts, like Gray Jay, will also assist with reviewing or drafting retirement regulations to ensure that all of these issues are addressed.