What About the Retirement Accounts?


Retirement accounts in divorce cases are easy to divide in some respects and difficult in others. Retirement money earned during the marriage is divisible. It generally does not matter if the other party refused to get a job where there were benefits, or if the other party withdrew his or her retirement years prior to purchase a car. If it was earned during the marriage, it is divisible.

There are generally two types of retirement accounts: 1) Defined Contribution Accounts, such as 401k, 403B and similar accounts where a person contributes a certain amount of money monthly and often employers will match a certain portion; and 2) Defined Benefit Accounts, which are generally pensions that provide the person with a specific payment upon retirement, generally based on an equation utilizing years of service and average pay.

In any divorce case, the court is required to divide the assets equitably and start with the basic premise that equal is equitable. The courts divide the marital portion of retirement benefits, i.e. the portion that was earned during the marriage. (There are circumstances where the court can divide portions earned before marriage, but I will not be addressing that issue in this post). Generally, the court will determine what the martial portion is by using a coverture fraction (year of marriage/years of work). For example, if a spouse works for an employer for 20 years and has been married for 15, and had a 401k with a value of $100,000 the court could apply the following:
15/20= .75
.75*100,000= 75,000
$75,000 is the marital portion of the retirement and each is entitled to half.
Non-employee spouse receives $37,500

The best part about this method is that generally, no one even has to do the math. The company managing the account will figure out what the marital portion is, divide it, and allow for increases and decreases in the market. There are other methods, such as looking at the value on the date of marriage and taking out that portion, but the coverture fraction seems to be preferred.

This is not to say that the court won’t, or the parties can’t agree otherwise. For example, one spouse may want to keep the house that has $100,000 worth of equity and the other keep their 401k worth $100,000. From a court perspective, if the parties agree to this arrangement and it is equitable, then there is no concern. However, if the court has to divide the assets, it is often looking not only to make the numbers equal, but equitable. Equitable considerations include liquidity, having a retirement account, and what cash assets are available. The court may not want to give one person all the cash assets and leave the other with all retirement benefits, which are not accessible without penalty until a certain retirement date.

Certainly, pensions are more difficult as it relates to determining value. If Husband has a pension that will pay $1,000 per month when he retires, what is the value? Again, coverture fractions resolve this problem. The court divides the marital portion, using the same fraction as above, the spouse will receive $375 per month. When the spouse retires, the company will send the spouse’s portion to him or her directly.

There are ways to determine the present day value of the pension where professionals use actuary tables and such to make what I consider to be a highly-educated guess, based on life expectancy and so forth. The present day value is a very useful tool if you want to negotiate to shift assets to one party in exchange for another party keeping his or her retirement. Generating such a value should only be done by a professional and that professional is generally not a divorce lawyer.

A Judgment of Divorce must state how pension benefits are going to be divided. However, the judgment itself does not actually make the division happen. A second order, a “Domestic Relations Order” (DRO) must be entered and is then sent to the company to effectuate the division. This is where it gets tricky. Many people forget or do not realize that this step must take place. Some companies have standard orders that you can fill out and enter yourself. Drafting your own DRO or using a form is not advised. There are many considerations, such as what happens when one person dies; does the other party get the benefit? The employee spouse will need to have elected for a survivor benefit and if he or she has not done so in the past it must be included in the DRO; otherwise, when the employee spouse dies, there will be no continuing benefit.

Additionally, there is specific information that is required to be sent to the company, including social security numbers. However, that information should not be contained in the court file, as it is a public record, and it is against the law for you to include your spouse’s social security number on a public document. If you submit the information with your court order to be signed, it will be contained within the public court file. The additional information should ONLY be provided to the company.

If you have a lawyer handling your divorce, he or she may even refer you to an expert to draft the DRO to ensure accuracy. Therefore, it is best to leave drafting the document to the professionals.