QDROs and Defined Contribution Plans: What's Wrong with the Language?
As a QDRO specialist with nearly 15 years of experience drafting retirement division orders, I am often surprised—and not pleasantly—by the lack of detail in parties’ property settlement agreements. The devil is in the details: vague agreements with missing specifics are often a recipe for disaster.”
With defined contribution plans—such as 401(k), 403(b), 401(a), and 457 deferred compensation plans—the language in a marital settlement agreement or court consent order is often minimal. So often, I only see a single sentence that states something like:
"Wife (or Husband) shall receive 50% of the marital portion of Husband’s (or Wife’s) Retirement Plan."
This phrasing lacks the detail necessary to properly prepare a QDRO. Below are key areas that should be addressed:
1. Complete Description of the Retirement Plan
Include the full legal title of the retirement plan to avoid ambiguity. For example: “XYZ Corporation 401(k) and Profit Sharing Plan.” This is especially important if multiple plans exist, but only one will be divided.
2. Defining the Marital Portion
Simply stating “marital portion” is often too vague, particularly if significant time passes before the QDRO is prepared. Determine if a pre-marital portion exists and provide documented proof of its value as of the date of marriage. For instance: “As of November 30, 2015, a pre-marital value in Wife’s Plan existed: $59,842.39.” If no pre-marital portion exists, state that clearly. Note that most employer plans will not calculate the marital portion between two dates; a separate calculation may be required.
3. Gains and Losses
Specify whether the awarded portion will include market gains or losses from the valuation date until the date of segregation. If market experience is included, confirm whether the plan provider can calculate gains and losses retroactively. Some providers, such as TIAA, do not calculate gains and losses and only transfer a percentage or dollar amount as of the segregation date.
4. Preparation and Processing Fees
Identify who will pay the QDRO preparation and plan processing fees. Fees can range from $250 to $1,200. Indicate whether one party will pay or the costs will be shared.
5. Treatment of Loans
Include language addressing any loans taken during the marriage. If no loans exist, state that, and clarify that any post-separation loans will be the employee’s sole responsibility.
Submitting the retirement division order promptly is crucial. Delays can result in significant issues for the alternate payee, including:
- Loss of investment gains on the awarded balance (if a flat dollar amount is awarded)
- Loss of the entire assignment if the participant terminates employment and withdraws all funds
- Loss of the entire assignment if the participant dies (and changes the beneficiary to someone else and the Plan pays out benefits before a posthumous QDRO is submitted).
- Loss of the right to name a beneficiary for the awarded portion if the former spouse dies before the QDRO is qualified
- Loss of control over investment decisions for the awarded portion
These issues should be addressed during divorce negotiations, with detailed language included in the couples’ settlement agreement. Doing so can prevent frustration and additional legal costs later.