As I’ve said in some of my previous blogs, divorce mediation is turning into more of an art than a science. When I first started mediating divorcing couples, I thought I would just learn how to do it and then pretty much plug the information into a standard agreement and keep doing the same thing over and over again. Eleven years later, I realize that I couldn’t have been more wrong.
An example of this is dividing retirement plans. Way back when the stock market was fairly stable (and I’m assuming that at some point investors did consider it stable), a couple would divide the retirement plan value using the date of the signed Settlement Agreement. The market was not subject to the wild fluctuations that we see today, and we would actually put a fixed amount in the Agreement for the non-titled spouse.
Since more and more people are delaying the divorce filing and Qualified Domestic Relations Orders (QDRO) preparation, usually for health insurance reasons but also for other reasons like they just never get to it, the retirement plan is being divided at a later date. The person that owns the plan says, “You know, I’m still contributing to the plan. Why should my soon to be ex-spouse get the benefit of me putting more money into the plan? I don’t want to do that. I want the marital interest to stop and to divide it now.” While that sentiment is understandable, what we are saying is that it might make more sense to make the division of the retirement plan (valuation date) when the divorce decree is issued, and here’s why:
Because of the fluctuations in the market, let’s say you put in a specific dollar amount now and you don’t execute the QDRO for a year. During that time the market tanks. The plan is supposed to be divided 50/50, but since you agreed to a specific amount and used the signing of the Settlement Agreement as the valuation date, you might actually be giving your ex-spouse more than 50% of the value of the plan. If the market goes down significantly, the dollar amount you agreed to might now reflect 75% of the retirement plan, or some other number greater than 50%.
Using the issuance of the Divorce Decree or Judgement of Divorce as the valuation date may result in a more equitable division. Here is why:
- If the market goes up and there is more money in the plan, there is more money to divide for both of you.
- If the market tanks, you both share the pain of the loss in value equally.
I understand the reluctance on the part of the spouse who owns the pension or the retirement plan. From their perspective they want the marital interest to stop immediately, but you really have to step back and look at the larger picture. Don’t assume the retirement plan is going to be worth more a year from now – – it might be worth less.