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Splitting Up Nest Eggs
Battles over retirement assets increasingly are the most contentious—and error-filled—part of divorce
If you or someone you know is heading toward, or already embroiled in, a divorce, the term can make your eyes glaze over: qualified domestic relations order.
For an ex-spouse, though, those four words can spell the difference between a secure or perilous financial future.
A QDRO, as it's called, helps divide a couple's retirement assets in the wake of a divorce. Such an order, for instance, would permit the custodian of a 401(k) to make payments to the former spouse of an employee.
As straightforward as that might sound, a QDRO is about much more than dividing dollars. A retirement plan will need a court order to carry out your wishes, and those wishes had better be spelled out in painstaking detail. What's more, retirement accounts are frequently the largest asset in a divorce proceeding. Given the precarious health of such accounts in the wake of the recession, every penny becomes critical.
"The stakes are higher now, which means negotiating a divorce is that much harder," says Emily Widmann McBurney, a lawyer with the Atlanta firm of Davis, Matthews & Quigley and an expert in QDRO law.
To learn more about divorce and dividing retirement assets, we visited Ms. McBurney in her office. Here are excerpts from the conversation:
Handle With Care
THE WALL STREET JOURNAL: Are QDROs part of most or all divorce proceedings?
MS. MCBURNEY: A good share of them—about half. In many families, a retirement plan is the only big financial asset. So, in those cases the parties often will need a QDRO, if there aren't other assets to divide.
WSJ: What are, or what can be, the consequences of neglecting or mishandling a QDRO?
MS. MCBURNEY: The consequences can be dire.
The process seems simple on its face. The parties will say, "We want to be fair, [so] we'll divide everything half and half." But the devil is in the details. The way you divide retirement assets can be very different.
WSJ: What's a good example?
MS. MCBURNEY: Let's say a wife and husband were in mediation in the summer of 2008, and they had a 401(k) with $100,000 in it. And what they meant to do was divide that account in half—where each spouse receives 50%—and adjust the account for earnings and losses from the day the two made this deal until the day it actually gets done.
But if what was written in the agreement says, "The wife gets $50,000," several months later, after the market collapsed, that would take on a whole new cast and a whole new argument. Because now the wife would say: "It says right here: I get $50,000." And the husband would say: "Well, I didn't say you get 100% of the account; that's the whole value of the account now."
I've even had cases where someone had to pay money out of their pocket under those circumstances, because they had agreed unwittingly to a dollar amount without anyone anticipating that those values would drop so dramatically.
Find an ExpertWSJ: What are the biggest mistakes attorneys make with QDROs?
MS. MCBURNEY: First, people don't differentiate, or even understand, what kind of retirement plan they're dealing with. There are defined-contribution plans—a 401(k) is the best example—and defined-benefit plans, which people usually think of as a pension. Each has its own issues and traps.
For example, I see a lot of agreements that say: "The parties will equally divide the husband's pension. The wife shall receive 50%, plus or minus earnings and losses from the date of the divorce forward."
Well, a pension doesn't have earnings or losses; there's no account with your name on it that's invested in the markets. So, while the attorney is putting all this irrelevant information in the QDRO about earnings and losses, they've taken their eye off the ball. They haven't asked: "What kind of surviving-spouse benefit is the wife going to receive?" If the QDRO doesn't say anything about that—and if the husband dies before pension payments begin—the wife might not get anything.
Another huge mistake is failing to understand the difference between qualified and nonqualified retirement plans. Qualified plans, like 401(k)s and traditional pensions, fall under federal regulations and can be divided between spouses by means of a QDRO. But nonqualified plans—which typically are reserved for upper-level employees and go by names like "supplemental executive retirement plan" or "excess benefit" plan—as well as stock options, restricted stock, [and] deferred compensation aren't subject to the same federal regulations and aren't subject to QDRO rules.
So lots of people make arrangements to divide up retirement benefits, and then they find that they have a nonqualified plan that is not allowed to make payments to anyone other than the employee.
WSJ: What's an example of that?
MS. MCBURNEY: In one case, the attorney didn't notice that the vast majority of the money was tied up in a nonqualified plan, and the divorce had one of these vague settlement agreements that just said the husband and wife were going to divide the retirement assets in half.
Well, the QDRO worked for the qualified portion of the assets, and the [husband's] retirement plan paid, let's say, $80,000 to the former wife. And she sat around and thought, "Hmmm, I wonder when I'm going to get the other $2 million I thought I was going to get?"—and it never came.
She finally got in touch with the [retirement] plan, and they said: "That other money—that's all nonqualified; you can't do a QDRO for that. You're never getting that money." And so that led to litigation.
WSJ: Does such litigation typically fail?
MS. MCBURNEY: It's not so much that litigation always fails. It's that you just never want to end up there. Litigation generally means that something has gone terribly wrong in drafting and/or executing a QDRO or settlement agreement, and both sides are spending lots of money on attorneys, post-divorce, which shouldn't be necessary.
Good TimingWSJ: What are the most important lessons you've learned about QDROs?
MS. MCBURNEY: I am a naturally optimistic person. But with QDROs, I guess I've learned to have a healthy dose of pessimism.
Often in a divorce, there's this sense: "I'm tired of dealing with all this money stuff; it's going to work itself out." Something like: "Oh, over time we'll divide up our bank accounts."
But [dividing retirement assets] is not the same thing as signing over a bank account. It's an order that has to be entered by the court and approved by the [retirement] plan. And it's an annoying and complicated process. I'll be the first to tell you that it's shocking how complicated it is. But that's the reality.
And so there's a certain resistance that I see, where people think: "Oh well, it will sort itself out. I'll deal with that later." And later may be too late.— Mr. Ruffenach is a reporter and editor in the Atlanta bureau of The Wall Street Journal and the editor of Encore. He can be reached at firstname.lastname@example.org.