Dividing Retirement Assets upon Divorce

One of the many uncomfortable conversations that I often need to have with my mediation clients involves the sensitive topic of retirement assets. As you can imagine, the division of retirement assets can be a very emotional topic; both for the retirement asset holder and for the spouse who may not have had the opportunity to work as much and save for retirement.

The purpose of this article is to provide a framework and some general knowledge about retirement assets and the procedure involved in dividing them upon divorce.

Types of Retirement Assets
Retirement assets come in many forms. A Defined Benefit Plan, otherwise known as a pension plan, provides the pension holder/employee with a benefit upon retirement based upon the employee’s length of service and earnings. With Defined Benefit Plans, the pension holder typically doesn’t know what the present-day value of the pension is at the time of divorce.  Another type of retirement asset is a Defined Contribution Plan. These plans allow employees to defer and invest pre-tax dollars that an employee may access upon the attainment of a certain age or upon retirement. For example, 401K, 403B and Individual Retirement Accounts (IRA’s) are all Defined Contribution Plans.

My Retirement Assets Are in My Name ONLY – Don’t They Belong to Me?
It is important to understand that even though retirement assets are only “titled” in one of the spouses’ names, any contributions to these types of plans during the marriage, are considered marital property. The challenging part of negotiating a settlement often involves determining the dollar value of the contributions made both pre and post marriage as well as obtaining a present-day value of a pension plan. There are, however, formulas for performing these calculations and professionals may be retained to assist with this.

How Does a Court Divide Retirement Assets?
The law of Equitable Distribution in New York (which dictates how the courts divide property), does not conclude in all cases that marital assets are divided “equally”. In other words, the term “equitable” does not necessarily mean “equal”. When a court divides marital property, a judge will consider numerous factors, including the duration of the parties marriage, the income and property of each party at the time of marriage and at the time of divorce, the future financial circumstances of the parties, and the tax consequences to the parties, to name just a few.

Mediating the Division of Retirement Assets
In mediation, the parties are free to negotiate any settlement that works for their situation, and this includes how retirement assets will be divided.  Sometimes the parties agree to waive all of their rights in the other’s retirement assets; and other times the retirement assets need to be evaluated to come up with a dollar value that will ultimately be divided.  In mediation, my clients are always free to work out their own settlement, including the division of retirement assets.

We’ve Reached a Settlement, Now What?
Once the parties have enough information and are able to reach a settlement, the actual division of the retirement assets in the next step.  To divide most types of retirement assets, a court order is needed, otherwise known as a Qualified Domestic Relations Order or “QDRO”.  A QDRO is either submitted to the court with the parties uncontested divorce papers (recommended), or it may be submitted following the divorce. Once signed by the judge, the QDRO is served on the plan administrator who then distributes or allocates the retirement assets pursuant to the terms of the QDRO.  The terms of the QDRO represent what the parties settled upon during their negotiations. There are many factors to consider when drafting a QDRO and it is important to engage the services of a professional proficient in drafting QDRO’s to ensure that it is done correctly.

How Best to Approach This Challenging Topic
While the mere discussion of how or if retirement assets should be divided is a stressful and often times emotional topic, the best approach is to try to keep emotions at bay and instead, view it as a business transaction.  I realize that this is far easier said than done; but those who are able to separate the two, will find themselves with less stress and greater peace of mind. Mediation and negotiations are a process, and it is best to take it one step at a time with the understanding that uncomfortable/tense conversations are a natural part of the process.

If you have any questions about retirement assets and how mediation can help foster an environment of mindful negotiations, please feel free to reach out – I would love to hear from you.