QDRO—An Insurance Policy for Your Retirement Interests
Divorcing couples often assume that their house is their largest marital asset and focus their efforts on “who gets the house, do we sell the house?” In doing so, they may overlook their second largest asset, which is their retirement account (and sometimes, these accounts are actually more valuable than their house!)
Most assets can be easily divided by, for example, selling the asset (i.e. the beach house, the Picasso) and splitting the proceeds. But, the funds in retirement accounts are difficult to access, cannot easily be divided and cannot be sold. The most concerning issue for clients is that retirement assets are only obtainable in later years so they are often put on the “back burner” in a divorce matter.
In 1974, the Employee Retirement Income Security Act (ERISA) and the 1984 Retirement Equity Act (REA) created a regime of important rules for pension plans that were designed, in part, to protect individuals from third-party malfeasance and impoverishment. After all, before ERISA and REA, there were many nightmare stories about pensions going bankrupt, leaving employees penniless, or administrators raiding pension funds for unscrupulous purposes. Also, there were no rules about spouses’ interest in the pension assets.
The upshot is that today the funds in a retirement account cannot be divided between spouses except through a specific court order called a Qualified Domestic Relations Order. Also, a Participant (Employee) often cannot move, transfer or deplete funds without the spouse (Alternate Payee) knowing about the activity and being part of the process.
The REA sets out the requirements for QDROs, including highly technical language which must be present. The best way to learn about the parameters for Orders is to do the research relating to the plan which involves checking on the ERISA websites, contacting the Plan administrator, obtaining models and procedures and getting the Plan administrator to pre-approve the Order. Incorrect construction of an Order can cause lengthy delays and added headaches to a difficult situation. Can you imagine the mess when an employee’s company gets acquired, the employee moves to a new job or the employee dies? The delays and rejections of Orders can be avoided by reaching out to a QDRO drafter early on (ideally, during the negotiation and drafting of the Marital Settlement Agreement) to understand the restrictions and options relating to the retirement account.
For this reason, drafting QDROs is a very specialized area and should not be an afterthought for divorcing couples. Often times family law attorneys will not draft the orders and send them to a handful of people that draft orders as part of their practice. Attorneys take this route because they know there are many intricacies to drafting a retirement order.
The goal of protecting your retirement assets should be just as important as protecting your house. After all, you would not own a house without having insurance. Therefore, you can associate a QDRO as an insurance policy for your retirement interest that you need to protect your future.