Calculating a QDRO value in a daily valued plan

[rcline46]

It has been proposed that the 'correct' or 'most accurate' method of calculating the current value of a QDRO in a daily val, self-directed plan is to find the actual shares as of the date of division, and apply dividends paid on the 'divided' shares from the date of division to current date to get the current number of shares, and then determine the value based on the current share values.

This method is EXTREMELY time consuming, and of course subject to human error. It may be 'perfect', but is it the only 'correct' way?

If it were a pooled, balance forward plan, one would apply the earnings rate only from date of division to current date. There would not be another way to determine the current value.

If the application of earnings rate is 'correct' in the balance forward environment, would it not also be correct in the daily val environment? That is, from the date of division to current, determine the earnings rate of the individual account, apply that earnings rate to the divided account to determine the current value of the QDRO.

What is your opinion on the acceptability, accuracy, and defensibility of the earnings rate method?

[QDROphile]

You could, and I would, argue that any reasonable method of calculation is permitted. I don't think it overstretches the proscription on asking the plan do what it is not designed to do to defend against the "perfect" approach unless the plan uses the perfect approach for some other functions of plan administration. If you add some sort of weighting adjustment, I think an earnings rate approach is OK. Maybe even if you don't add weighting. I would also defend a plan that would not retroactively try to adjust for earnings, as long as the plan would make all of the investment data available to someone who would provide a figure for earnings adjustment for the time prior to the implemenation of the division, so you may question my judgment.

[Mike Preston]

So, I'll question your judgement!

Your proscription reigns supreme. The plan simply doesn't do anything that it wouldn't otherwise do, period. If a DRO comes through asking for something they wouldn't otherwise do.......REJECTED.

Back to the question raised... is it the correct way? Possibly. We call it the tracing method. And the plan leaves it up to the participants and their advisors to do the tracing and come up with a clear instruction to the plan that it can implement without violating the previously mentioined proscription.

Slight disagreement on the records, too. The plan is required to disclose what it is required to disclose. Nothing more. Nothing less. If the plan participant received said disclosure and now has lost it and goes to the plan for that information and it isn't normally available, then tough toenails for the participant and/or spouse. They have to deal. Of course, in most cases a plan does have the information available, but in various takeover cases I've seen the correct answer be: "Huh?"

[rcline46]

Mike, when did you become an attorney? I am trying to follow your answer and the only conclusion I get is - let the parties calculate the current value of the prior theoretical split.

That doesn't answer the question as to whether a rate of return calculation is/would be just as acceptable/defensible as a 'tracing' method.

I happen to think it would because it combines the gains/losses of each individual item into one number. And it is easier to prove where the values came from.

[Mike Preston]

Mike, when did you become an attorney? I am trying to follow your answer and the only conclusion I get is - let the parties calculate the current value of the prior theoretical split.

Not an attorney. But I played one on TV once. Wait. Scratch that. In any event, the plan does what it normally does. Nothing more. Ever. The parties take that and tell the plan what to do or how to calculate something (a formula, not an action verb).

Me thinks you agree with this. The alternative is chaos. "Earnings attributable to days where the stock market was up are to be credited to alternate payee. Other days, the earnings (losses) are to be credited to (debited from?) participant. Why not? It is clear. It is calculable? Surely an extra 30 or 40 hours work means little.

That doesn't answer the question as to whether a rate of return calculation is/would be just as acceptable/defensible as a 'tracing' method.

If the QDRO says that, and the plan is willing to do it (that is, it accepts the DRO as a QDRO), wonderful. Anything which the parties agree to, that the plan is willing to implement, is acceptable. There is no place for "defensible" as that doesn't enter into the determination.

[rcline46]

Ahhhhh, now we get to the point. I have never seen a DRO that specifies a method of calculation. They only say something like 'adjusted for gains or losses to the distribution date'. Now maybe you have seen something specific, or maybe you 'suggest' more clarity in reviewing a DRO.

Given that I would receive a DRO/QDRO with the vague 'apply gains or losses' it would appear that you are suggesting that it be rejected unless it is a pooled/trustee directed account. In a self-directed plan I should either let the parties calculate, or be given specific instructions as to either a tracing or rate of return metod. Maybe I am unique, but I don't think I will ever be given such detailed instructions.

Which brings me full circle back to - how much trouble could I be in to use a rate of return calculation in a self directed plan?

[QDROphile]

I don't know how far you can push section 414(p)(2)(B). I think 'apply gains or losses' might be good enough, but the plan can use a reasonable method.

[FormsRstillmylife]

We run quarterly valuations on our daily plans. We advise employers' to reject a DRO requiring segregation as of a date that is not a quarterly val date. When we receive a draft from the attorney, we give him the quarterly dates surrounding the requested date and say pick one.

[Mike Preston]

This gets to the ambiguousness issue. When a DRO is accepted as a QDRO, we sometimes find, at a later date, that there are still some unclear items (there shouldn't be, but life isn't perfect). At that point, the story goes, the Plan Administrator usually writes a letter to the parties saying "this is what we intend to do, let us know if this is inconsistent with what you think the DRO tells us to do" and then waits an appropriate amount of time and then just does it.

So, in answer to your question, if you choose the disclosure route, I don't think you have a problem at all.

As long as what you think the DRO is asking you to do is consistent with what it actually is asking you do to. Make sense?

[Kevin C]

Not an attorney. But I played one on TV once. Wait. Scratch that. In any event, the plan does what it normally does. Nothing more. Ever. The parties take that and tell the plan what to do or how to calculate something (a formula, not an action verb).

Mike, How would your view apply to, for example, a daily valued plan that receives a DRO today assigning a benefit as of a date two years ago? We seem to get these at least a couple of times a year. Usually, the lawyers will cooperate and change the assignment date, but not always.

[Guest Sieve]

Now, now . . . eveybody calm down. The board has been a little snippy lately . . .

Family law attorneys who draft these QDROs (or, more accurately, crib them from the latest seminar they were at--how else do you explain a QDRO discussing accrued benefits being sent to a 401(k) plan?) don't understand the issues we're discussing here, but they do understand that certain administrative processes cannot be changed. Normally, you just tell the attorneys that this is the way we do it, so adjust the QDRO or your expectations. I often use Mike Preston's approach of informing the parties how the Plan will interpret the QDRO--and it works (i.e., either you get a revised QDRO, or a phone call, or silence and acceptance). I have, in fact, seen many QDROs which specifically say that each investment in the acount as of date X is to be split 50-50, and adjusted subsequently for gains & loses, and the administrator--rather, the TPA--then does what it can to accomodate, within reason. If you cannot accomodate, you just work with the parties' attorneys to figure it out. And it usually doesn't take that long--at least in my experience.

As to determining assets on a specific date years ago, many daily-valued plans can do that. If not, just let the attorneys know, and figure out what works best. Surprisingly, cooperation often works and makes life a bit more simple!!

[Kevin C]

Sieve,

I hope you didn't think I was being snippy. That certainly wasn't my intent. On second thought, I probably should have edited out Mike's joke from the paragraph I copied. But, hey, I liked the comment.

Our daily system doesn't work well with retroactive assignment dates outside the current plan year. We usually take the approach you describe in those cases. But, sometimes the attorneys don't care if they create extra work for us. I was hoping Mike had an arguement I could use to reject the DRO the next time the attorney doesn't want to be reasonable.

[Guest Sieve]

You weren't being snippy. And I certainly was not complaining. The bits of passion in people's posts can help make our interpretations of ERISA enjoyable (or at least somehwat palatable) . . .

I would think that the rejection approach can work with uncooperative attorneys--determining the benfit payable to the alternate payee, as it's described in the QDRO, is just not possible.

[Kevin C]

The problem is that it is not impossible for us to go back that far with an assignment date. It just can't be done within the valuation system and it can not be done without spending a lot of time working on it.

[Guest Sieve]

Then I think you determine a cost for doing the extra work, and let all parties know about that cost. They can decide whether or not to agree to the simpler method to prevent the imposition of your fees.

[Kevin C]

If the participant is going to be charged the fee, it has to be disclosed ahead of time. It appears to me that the SPD is the proper place for that disclosure. We haven't convinced ourselves that $X per hour is sufficient disclosure for this type of fee. So, unfortunately, at this point, we don't have proper fee disclosure to charge the additional amounts to the participant. The increased fee argument only works if they are the ones who have to pay the increased fees. If anyone has wording suggestions, I'd love to see them.

[RTK]

How about this from one of my qdro procedures:

"Because the Plan provides for participant-directed investments, daily valuation of account balances, periodic contributions and periodic distributions, the Plan cannot readily determine or provide a statement of past earnings and losses on an individual participant's account balances. For example, the Plan does not have any records that would indicate how much a portion of the participant's account as of December 31, 1997 would be today if adjusted for proportional earnings and losses from December 31, 1997 to date. This amount can be calculated by the participant and/or alternate payee using the participant's account statements."

The family law attorneys are not pleased, but the plan administrator is happy.

[QDROphile]

What is your policy about providing copies of the account statements from the December 31, 1997 date to the most recent, assuming participant consent?

[Kevin C]

RTK,

Thanks for the suggestion. What do you do if the attorney ignores the QDRO procedure and prepares an order now assigning at say 8/1/2007 with gains and losses separately from 8/1/2007 forward? Do you reject the order as not being a QDRO?

[RTK]

QDROphile:

The Plan will provide participant statements, and generally has good enough records to do so.

Kevin:

Yes, the order is rejected. The obvious question is on what grounds. I've had that conversation with the family law attorneys - basically something like this: (1) the Plan doesn't have a record of the amount; (2) the Plan does not have the staff to calculate the amount; and (3) why should the Plan use plan assets to pay someone to do your work in dividing marital assets. As noted, the Plan will provide statements for the parties to calculate the amount.

If push came to shove ERISA wise, I guess I would argue (and I have not had to yet) that the order is asking for a type or form of benefit not provided by the daily valued plan.

That said, I work with some daily value plans that have a procedure (I believe a spreadsheet) to calculate this amount depending upon the period covered. This same paragraph from their qdro procedures reads as follows:

"Because the Plan provides for participant direction of the investment of account balances, daily valuation of account balances, periodic contributions and periodic distributions, the Plan cannot precisely calculate past earnings and losses on an individual participant's account balance. For example, the Plan does not have records that would precisely state how much a portion of the participant's account as of December 31, 1997 would be today if adjusted for proportional earnings and losses from December 31, 1997 to date. Thus, if such an amount is requested, an approximate amount will be provided but only if it can be readily calculated. If it cannot be readily calculated, the amount will have to be determined by the participant and/or alternate payee using the participant's account statements."

[Guest mjb]

Plan admin do not have to accept DROs which increase the complexity of plan administration or if it is not possible for the plan to determine the valuation requested, e.g. becuase there are no records available. Consider this: what are the options available to the AP if the plan adm says no.