Cutting the Knot--but Not the Benefits

How to protect your retirement after divorce

Susan Dolan thought she had secured a share of her former husband's retirement benefits. So why is the 67-year-old Cairo (N.Y.) resident without a pension today? As happens to many divorced women, Dolan saw her claim to her ex's benefits evaporate when he died in 1999. Her attorney, it turned out, had neglected to make sure her monthly checks would continue after his death. "I've seen cases where former wives have gotten nothing at all," says George McCauslan, whose San Francisco actuarial consulting firm specializes in divorce cases.

If you are divorced or separated, the key to securing retirement benefits is to arm yourself with an obscure legal document called a Qualified Domestic Relations Order. A QDRO establishes an ex-spouse's right to a portion of a retirement account. Indeed, without a QDRO for each account, it's virtually impossible to get a dime--never mind your fair share (which is generally 50%)--of the benefits your spouse earned during marriage in 401(k), defined-benefit, and other retirement plans that qualify for special tax treatment.

"MALPRACTICE MISTAKES." QDROs benefit account owners by insulating them from paying taxes on dollars that are transferred to a former spouse. Still, it's the person who earns less--often the wife--who has the most to gain.

Retirement accounts are worth fighting for because, fattened by the bull market, they are a large part of the average household's wealth. In 2000, the average 401(k) balance stood at $49,160, while the typical family with traditional individual retirement accounts held $85,600 in them. When you also consider the value of defined-benefit, employee-stock-ownership, and profit-sharing plans (not to mention stock options, which aren't covered by QDROs), it's easy to see why women who rely on the old formula for divvying up assets--she gets the house, he gets the rest--can shortchange themselves.

QDROs and similar documents that divide retirement plans for government employees can be complicated, and not all divorce lawyers may be up to the task. It can pay to hire a specialist to draft the appropriate documents. In fact, because attorneys have been known to make mistakes that have cost clients thousands of dollars in lost benefits, you may want to take your agreement for a second expert's opinion before signing anything. "More malpractice mistakes are made with the QDRO than with any other area of divorce law," says Carol Ann Wilson, president of the Institute for Certified Divorce Planners of Boulder, Colo., which trains financial planners to handle divorcing clients' finances.

One big mistake is to adopt the model QDROs that many retirement plans publish. Sample QDROs don't always guarantee survivor benefits, cost-of-living increases, or a share of a golden parachute, says Tim Voit, president of Voit Econometrics Group in Naples, Fla.

It's relatively easy to divide IRAs, 401(k)s, and other accounts with values that can be read off of quarterly statements. Take a man with a 401(k) now worth $200,000--half of which accumulated while he was married. His wife can generally expect to receive about $50,000, or half the $100,000 earned during the marriage. That's because every state considers benefits that accrue during marriage the property of both spouses. Although a divorcing couple is free to negotiate any split the parties wish, if they disagree, the courts generally take a 50-50 approach.

For the wife to secure her share of the husband's 401(k), she must get a QDRO (or, in the case of an IRA, a court order) and have it approved by the court and the plan's administrator. The document should say whether the parties want investment gains or losses shared equally or disproportionately until the split occurs, says Marc Schechter, an attorney at Butterfield Schechter in San Diego. It's also a good idea to include a clause reducing the husband's share of the account by the amount of any loans or withdrawals he takes from it, says Violet Woodhouse, a Newport Beach (Calif.) attorney.

SURVIVOR BENEFITS. QDROs are far trickier to prepare for defined-benefit plans. The problem is, it's difficult to calculate how much someone who has yet to retire stands to receive in monthly pension benefits. The first thing to consider is whether the nonemployee spouse--say, the wife--is entitled to a share of her ex-husband's benefits as of the divorce or as of his retirement. Generally, she has more to gain by getting a slice of his retirement-age benefit because--if he stays at the company--this includes future years of service at higher salary levels. You may have to adopt the method generally used in your state, says Edwin Schilling III, an Aurora (Colo.) attorney who specializes in pensions.

Next, the QDRO must spell out the formula to be used to divide the monthly check. According to Schilling, in most states the parties start by calculating the fraction of the employee's career that took place during the marriage. For example, say a man was married for 20 of the 30 years he worked at aerospace company Boeing--or two-thirds of his tenure. If he receives $12,000 a month in retirement, he must share two-thirds of that amount, or $8,000, with his former wife, who is entitled to half of it, or $4,000.

The beauty of this approach is that it avoids the imprecise exercise of valuing future pension benefits. Instead, you simply wait for the checks to start and take your share based on a pre-agreed formula. However, if you want to keep the house in return for your share of the pension, you have no choice but to hire a valuation expert. (When you take taxes into account, such a deal might make sense, says Ginita Wall, a San Diego financial planner. That's because while you don't have to pay taxes on up to $250,000 of profit on the house, you owe ordinary income taxes on every penny of retirement funds.)

The next issue to resolve is survivor benefits. Without this protection, your pension checks will stop upon your ex's death. If the divorce occurs before your spouse retires, the plan might allow you to elect a so-called separate interest. This is to your advantage because it means your benefit will continue for as long as you live. One caveat: If your ex dies before reaching retirement age, your benefit could be at risk. So make sure your QDRO includes survivor benefits in this situation.

If your spouse has already retired, or the plan does not allow for a separate interest, you will receive a shared interest, which ties your monthly check to your ex's longevity. Even if your spouse elected a survivor benefit for you during marriage, your QDRO must request coverage post-divorce. Again, make sure you are protected both before and after your ex's retirement. (In contrast, if your marriage lasted at least 10 years, you are guaranteed a share of your spouse's Social Security benefits.)

Even if you are already divorced, it's not too late to get a QDRO or fix a poorly drafted one. Simply file an interim QDRO that claims survivor benefits, and follow up as soon as possible with a fully prepared document. After all, for many women--particularly those who took time away from work to tend to the home front--a QDRO may be the only route to a secure retirement.

By Anne Tergesen

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