By far, the number one question we hear when it comes to Qualified Domestic Relations Orders (QDROs) is this: how much am I going to get? It’s a very common misconception that the person drafting the QDRO needs to know the dollar amount – or to do any math at all, really?
Other than divorce settlements that prescribe a specific dollar amount, nearly all QDROs are written as formulas – fifty percent of the balance as of the date of divorce, or a fraction representing the pension credits earned during marriage divided by the whole career, times one half – things like that. Even fixed dollar awards often have to be adjusted for stock market performance, as the amount in a retirement account varies every second with the underlying stocks and other investments.
Who does all that math? In most cases, it is the plan administrator – the one with all the past records from the plan and up-to-date figures on investment performance – who runs the calculations. This means, for purposes of your order, unless the plan administrator doesn’t have records available, you don’t have to know figures or do any mathematical calculations to draft your QDRO. But, if you are unlucky enough to face a retirement division split where the plan administrator doesn’t have the required records, what do you do then?
The Most Common Reasons Why Plan Administrators Lack Records
Time. Much like people change banks and move money around, employers and employees often will shift retirement funds to new institutions.
For employees, this often happens when they change jobs – they roll over the plan to a new job or to an IRA account.
And for employers, they may switch vendors from one financial institution, such as Charles Schwab, to another, such as Fidelity. Every time this switch is made, the new institution will typically start fresh books, meaning calculations and valuations before that switchover date cannot be run unless you provide past statements. Even then, very few plans will be willing to do the math using old statements from another bank. While these administrative switchovers don’t happen frequently, they absolutely do happen and the odds of this becoming an issue increase greatly if you wait to do a QDRO or if you need to address a pre-marital interest in a plan and that interest dates back many years.
Keep in mind that the problem of lost records is primarily one for 401(k) and other deferred compensation (cash-based) plans. Pension plans are most often divided by a time-based formula that converts marital service time to a percentage at the time of retirement, so lost records from the past are almost never are an issue.
What to Do When The Plan Admin Can’t Run Numbers
Accurately valuing retirement assets is a critical part of drafting a QDRO. This involves determining the present value of the retirement account(s) being divided as of the date of divorce. This calculation is typically done by the plan administrator, using past statements and investment data. When the plan administrator changes, and it isn’t possible to access past valuations or run new calculations using the same methodology, it creates significant challenges in accurately determining the value of the retirement assets being divided.
The answer to lost records or plan administrators that won’t run calculations is to do some math before writing the QDRO. How much math? That’s largely a matter of your comfort with “close enough” numbers and/or the value of the account.
For high-value accounts or parties who need to know that the calculations are as close to perfect as possible, you’ll want to bring in an accountant or financial advisor that can look at what statements you do have available and work backwards on the math to fill in the gaps in your records. From there, they can typically come up with a pretty fair data-driven estimate of each party’s share, including stock market adjustments. These experts don’t come cheap – depending on your location and how complex the calculations are, this could cost thousands of dollars.
On the other hand, many people are comfortable enough with “back of napkin” math, especially after spending a ton of time and money on lawyers and a divorce. Rather than hire experts, they’ll look at how much money the employee contributed each month, what the balances are on the statements that they do have, and estimate what the account was worth at the date of marriage, the divorce valuation date, and the division terms (typically 50/50), to come up with their own “fair” number.
Avoid The Problem By Drafting Your Order ASAP
If you’ve taken anything away from this article, it should be that time is of the essence when drafting a QDRO. Once those plan records are lost, the process becomes one of guesswork, negotiation, and uncertainty. On the other hand, if a QDRO is drafted while the divorce is fresh and records are at hand, it becomes a matter of providing a formula and letting the plan do the simple math.
Our QDRO machine was built to support over 500,000 private retirement plans, with versatile drafting choices that allow you to divide via percentages, formulas, or even fixed dollar awards after running your own calculations on what you think is a fair split of your retirement accounts. The important thing is to get started as soon as possible so that the problem of lost records of a deceased party do not derail the process and jeopardize your rights to the retirement account. Get started today and preview your document before you pay.
