For many couples, their retirement accounts are one of the most valuable, if not the most valuable, assets they own. The issue of retirement accounts and divorce can be very tricky and there are day-long courses on the subject for attorneys, so I won’t try to provide in-depth information and analysis here. I will talk about the types of retirement accounts and some issues that can arise in the divorce context.
Two basic types of retirement accounts are pensions and 401(k) accounts. Pensions are rare these days, held primarily by government employees. Many workers have interests in pensions from their current or previous employer, where the pension plan is no longer active and has been replaced by another type of retirement plan. Although the pension plan is no longer active, those individuals still have an interest in that plan. Pension plans pay a certain monthly retirement benefit for the remainder of the employee’s life, usually determined by a formula based on their age and last salary prior to retirement.
Most retirement accounts these days are 401(k) or 403(b) or some sort of similar plan in which the employee contributes funds to a specific retirement account, sometimes with a matching contribution from the employer, and the value of that account is determined based on the market performance of the investments in which the funds are invested. Unlike pensions, these plans do not provide a guaranteed stream of income and are more like a retirement “savings account.”
So what could be so complicated about dealing with retirement accounts? Two big issues stick out here. The first is how to value the account and the second is how to properly divide it if it’s going to be divided. Defined contribution plans, such as 401(k) accounts, have a set value based on how much money is in the account on a certain date, and then you get into whether there are any loans outstanding from the account and dealing with contributions and gains or losses to the account after the parties separated. Also, the funds in these accounts are pre-tax funds, meaning you don’t pay tax on the money until it’s withdrawn. Who’s going to be withdrawing those funds and what will the tax implications be?
Pensions are not as clear-cut to value. We usually hire actuaries to calculate a present value for pensions, which reduces that expected stream of payments from the date of retirement until the date of death to a lump sum number. Factors such as life expectancy and age at retirement affect the present value of pensions. Two different experts could look at the same pension and come up with two different numbers for the present value, depending on the assumptions they use. You must also consider whether the pension is in pay status and if so, have the payments been considered as income for support purposes. Another common valuation issue is whether there will be a survivor annuity from the pension for the spouse, which would have it own separate value for divorce purposes.
Pensions must be divided by court order and that court order must comply with the rules established by the pension plan administrator. Plans such as 401(k) accounts sometimes require a court order and sometimes don’t, depending on the terms of the specific plan.
The bottom line is that you should have an attorney involved in the process. You need to make sure you and your attorney understand the variables to be considered and the impact of those variables on the value and distribution of your retirement accounts. You should also pay for an expert to be involved if necessary. It will be money well-spent, to make sure you’re making fully informed decisions and to ensure that the instructions to the retirement plan provider are accurate and enforceable.