Can the QDRO dictate which assets to be used?

[AlbanyConsultant]

A plan has 401(k) & safe harbor on a mutual fund recordkeeping platform, and the profit sharing in a pooled account.  Participant P has a current balance of $200K in his individual accounts and $50K as of the latest valuation in the pooled account, and the segregation amount is slated to be $130K.

For the sake of ease, obviously, it would be awesome to pay out the QDRO from the platform.  The attorneys are writing that into the QDRO.  Do they have that right?  Isn't that the Plan Administrator's authority to decide where to pay the QDRO from?  As long as the dollar amount is satisfied, that should be all they care about, I'd think.

Any thoughts?

[Larry Starr]

The QDRO cannot direct where the funds are paid from, except that it can direct that the funds be paid proportionally from different source accounts (pre-tax, after-tax, etc) and that it can be determined assuming no loan outstanding.

If a DRO were to come to me with that language, we would either reject it or ignore it (I'm not sure if we can get away with ignoring it; I have to research that one).  In either case, the other side would be informed that the direction of where the funds are to come from is not within their authority.

[jpod]

First, any such order would make sense only if the APs share is to be segregated to a separate account for the AP under the plan, as opposed to an immediate distribution.  Given that, what in  Section 414(p) says that a QDRO can't dictate the investment sources of the alternate payee's share?  This is assuming that the terms of the plan don't prohibit that, although I would question whether the terms of the plan COULD prohibit that.

[QDROphile]

My first inclination is to mostly agree with Larry Starr and say the the order can specify that the alternate payee's subaccount(s) can be created as of a specified date by designating x% the participant's mutual fund portfolio and y% of the participant's pooled fund account (or dollar amounts from each, which can be translated into percentages).  Part of my approach assumes certain limitations on the mutual fund platform.  Fidelity,for example, has lots of limitations, to the point that I think Fidelity puts the plans at risk of violation of the law. I would modify depending on exactly how the mutual fund platform and pooled fund worked and what the participant is able to do by way of transfer of funds.  System capabilities are a big factor.  For example, if the pooled fund is valued only annually, then any division of the participant's pooled fund interest would have to fit with what the plan is able to do administratively with pooled fund balances.  At the extreme, the AP's pooled fund interest would have to be specified as a dollar amount or a percentage of the balance as the the valuation date.  If the mutual fund platform has great administrative capability and flexibility, then the plan should be able to accommodate even a specification of the AP's share of each investment.  The limitation is IRC section 414(p)(3)(A).

[AlbanyConsultant]

This seems to be a situation where the P and AP attorneys are working together to get this resolved smoothly, so I think this is something they have cooked up together.

To Larry's point, I could have them re-word it to attach the 401(k) and safe harbor sources, and that would have the same result as taking the money only from the daily-valued accounts.  Are we supposed to be reading "plan" in 414(p)(1)(A)(i) as a disaggregated portion of a plan - is that where the idea of them being allowed to instruct by money type comes from?  Otherwise, I'm not seeing it in there.  Couldn't they say that (2)(B) gives them that authority?

The individual accounts are with MassMutual; I believe they have a two-step process where first the money is moved to an account for the AP and then the AP elects when to take the distribution (it's at AP's discretion at that point).  So even if the QDRO says that it is for an immediate distribution from the P's account, that's not exactly how it goes.  I expect that I can submit Form whatever to MM saying create an account for AP and segregate $130K as of today from P to AP (well, maybe it needs a separate enrollment form to create the account, but you get the idea).  MM will do a pro rata transfer from all funds P holds.

Thanks for the quick responses.

[Luke Bailey]

I have drafted QDROs that specify particular assets, e.g. real estate developer with liquid and illiquid assets in profit sharing plan, wife's lawyer insists on taking only liquid. This is similar, my guess is the employer is an investment company and what you refer to as the "platform" account has more liquidity. If the plan is OK with it, it works fine. If the plan is not OK with it, not sure how the argument would come out, but probably not worth it, right?