In many divorces, the most significant assets – even more so than the parties’ residence – are their pension and retirement accounts. It is not unusual in longer marriages that the parties may have 401K or similar plans totaling hundreds of thousands of dollars or a pension plan that will pay a significant monthly benefit upon retirement.
It’s been said that a little knowledge is a dangerous thing. Many attorneys who represent clients in divorces have a passing familiarity with how retirement plans and pensions are divided, but the laws in this area – a combination of federal and state laws – are complex and require a depth of knowledge and experience to make certain your rights are protected.
There are two main types of retirement plans and accounts. One is where the employee (and usually the employer as well) make regular contributions to an account that with sound investment decisions over time can grow to a significant amount which, upon retirement, is paid to the employee. A 401K is such a plan. The other type of plan is the traditional pension plan where a monthly benefit is paid upon retirement based upon a formula that takes into consideration how long the employee worked for the company or union sponsoring the pension plan.
There is a significant difference in how each of these two types of plans are treated in a divorce. A factor to be considered in the first type is how much money was contributed to the retirement account while the parties were married, whereas in the second type the important factor is how much of the time the employee worked for the company he or she was married.
Here’s an example based upon a recently decided case in New York. John began employment with Acme Inc. when he was 28 years old and not yet married. By the time he married Alice, when he was 36 years old, he and his employer had made contributions to a 401K account which, together with earnings, had a value of $20,000.00. John had the good fortune to work for a company that also had a pension plan in which he participated for the 8 years he worked there before he married Alice, then while he was married, and then after he and Alice were divorce after 20 years of marriage. Assuming he retires at age 60, he will have worked at Acme for 32 years, of which he was married 20 years. His monthly benefit from the pension plan at age 60 will be $1,800.00.
The established formula for deciding how much Alice should receive of this amount is based on a ratio of John’s years of employment while married (20) divided by his total years of employment at Acme (32) times a factor, usually but not always 50%, times the monthly benefit. So Mary will receive $562.50 per month (20/32 x 50% x $1,800.00) and John will receive $1,237.50 per month.
John continued contributing to his 401K, and Acme matched the contributions, while he was married. When he and Alice were divorced the account was worth $85,000.00. Remember that he already had $25,000.00 in it when he married Alice, which over the 20 years of marriage he is able to prove would have grown to $35,000.00 even if no additional contributions had actually been made by him and Acme to the account. The established formula for deciding how much Alice should receive from John’s 401K plan would first subtract $35,000.00 from $85,000.00, leaving $50,000.00 x 50%. Thus she would get $25,000.00 and John would keep $60,000.00.
But John’s lawyer made the mistake of agreeing to the division of John’s 401K plan using the formula for the other type of plan. Thus, at the time of the divorce John and Acme had been contributing to the plan for 28 years of which he was married 20 years. So: 20/28 x 50% x $85,000.00 equals = $33, 393.00 (rounded), so Mary received $8,393.00 more, and John was left with $51,607.00, which is $8,393.00 less than he would have kept if his attorney had known what he was doing!
The scary part is that the difference between the two main types of plans and how they are divided in a divorce is about as basic at it gets. There are numerous other issues – qualified joint and survivor annuities, qualified preretirement survivor annuities, plan loans, and disability retirements to name a few – that are more complicated. If your attorney is not knowledgeable and experienced in this area your rights may not be adequately protected.