QDRO date of segregation in DC Plan

[J Simmons]

Here's the situation. QDRO says that awarded to ex-spouse is $xx,xxx as of "date of segregation". Does that meet the "clear award" standard of IRC § 414(p)(2)(B)?

My concern stems from shifts in the value of the employee's DC plan account one day to the next. The current market volatility makes this concern more vivid. It takes a plan administrator time to review and determine that a received order is a QDRO. Then there is a time lag for the implementation--the segregation--from the time the plan administrator sends its instruction to the recordkeeper/custodian. The speed in turning this around is relatively quite quick (a matter of 2 to 3 weeks). Given that the regulations specify a reasonable amount of time, no more than 18 months, a 2 to 3 week turnaround time seems reasonable. After all, the outside parameter mentioned by those regulations is 18 months. However, there’s a big difference in the proportion of the employee’s account that gets carved out if that was effected by recordkeeper/custodian on March 9 when the Dow Jones was around 6,400 as opposed to last Friday when it was around 7,700 hundred. That’s just a couple of weeks. My concern is the possibility of an employee pointing a finger at the plan administrator if the 'segregation' took place on March 9 when it would also have been within the reasonable turnaround time to have done effected the 'segregation' on March 27. What I do not like is the perception that could spawn out of the potential for market timing manipulation by the plan administrator, at least it might look that way from the employee’s perspective.

Any thoughts on whether the Plan Administrator could insist on an exact date (e.g., April 5, 2009) rather than "date of segregation" in the name of needing that clarity per IRC § 414(p)(2)(B)?

[QDROphile]

Nope. The order instructs the altnernate payee account to be set up with an amount as of the date the account is actually set up. This is quite neat from a record keeping perspective, but stupid for anyone who is looking for any kind of certainty (or as close as one can get with a moving target). One may presume that the adminisitrator will get around to the task in due course, since it has a fiduciary duty to do so. One may also presume that the administrator is not so stupid as to attempt market timing, even if inclined to favor one person over another (which would be a breach of fiduciary duty).

[J Simmons]

Thanks, QDROphile. I don't suppose there's any authority to cite to that, just that $xx,xxx as of the 'date of separation' does lend itself to the level of certainty needed from the plan and PA's perspective to effectuate the award sought by the QDRO. If however you know of a cite, that would be great.

There's no effort going on in the actual situation by the PA to manipulate the timing (or the market values), just an upset employee that has pointed out the impact to the balance of his remaining benefits because the award was in fact implemented (i.e., date of segregation) on March 9 and the employee has seen the bounce in the market values since that date. The employee has alluded that the PA was somehow timing the implementation for the best interests of the alternate payee.

PA was hoping it could, in the future, insist in the name of needed clarity for an actual month, day and year for the valuation of the awarded portion.

[QDROphile]

Red herring. The participant should have provided for a date certain in the QDRO if the participant did not want the uncertainty. The PA has to understand that one person or the other is going to regret market swings no matter what the method for implementing the division, and no implementation and payment can ever occur fast enough for an alternate payee. The PA should not worry about the terms of the order, except to execute a proper one in an administratively reasonable way.

However, the PA has to look out for service providers like Fidelity, whose systems will not allow proper QDRO adminstration. In those cases, the written QDRO procedures will have to work around the inadequacies of the system as well as possible and a person drafting an order will as least know the rules of the modified game.

[masteff]

Personally, "date of segregation" is the best possible for the recordkeeper because it requires zero adjustments for events between dates of "award" and "segregation". When the system can't do it automatically, they turn to spreadsheets. And I've seen a scary spreadsheet or two in actual use by recordkeepers which makes me certain that the less adjustments on divisions, the better.

[Guest mjb]

Here's the situation. QDRO says that awarded to ex-spouse is $xx,xxx as of "date of segregation". Does that meet the "clear award" standard of IRC § 414(p)(2)(B)?

My concern stems from shifts in the value of the employee's DC plan account one day to the next. The current market volatility makes this concern more vivid. It takes a plan administrator time to review and determine that a received order is a QDRO. Then there is a time lag for the implementation--the segregation--from the time the plan administrator sends its instruction to the recordkeeper/custodian. The speed in turning this around is relatively quite quick (a matter of 2 to 3 weeks). Given that the regulations specify a reasonable amount of time, no more than 18 months, a 2 to 3 week turnaround time seems reasonable. After all, the outside parameter mentioned by those regulations is 18 months. However, there’s a big difference in the proportion of the employee’s account that gets carved out if that was effected by recordkeeper/custodian on March 9 when the Dow Jones was around 6,400 as opposed to last Friday when it was around 7,700 hundred. That’s just a couple of weeks. My concern is the possibility of an employee pointing a finger at the plan administrator if the 'segregation' took place on March 9 when it would also have been within the reasonable turnaround time to have done effected the 'segregation' on March 27. What I do not like is the perception that could spawn out of the potential for market timing manipulation by the plan administrator, at least it might look that way from the employee’s perspective.

Any thoughts on whether the Plan Administrator could insist on an exact date (e.g., April 5, 2009) rather than "date of segregation" in the name of needing that clarity per IRC § 414(p)(2)(B)?

What right does the employe have to make a determination that the plan administrator delayed the segregation?

As the Supreme ct has recently illustrated in the Kennedy case plan administrators can administer benefit rights of ex spouses in accordance with the plan provisions. PAs are not liable for changes in account values which occur between the time a request is made for a distribution/segregation and the date the distibution/transfers occurs; otherwise PAs would be guarantors of a participant's account balance as of the date the request is made which is inconsistent with the IRC 414(i) requirement that a participants' account be adjusted for gains and losses which are allocated to the participant's account.

I dont underrstand why the PA did not ask for clarificiation of what was intended. For example, was the $ amount intended to be provided from cash or investment in the account.

I also disagree that plan has to make adjustments for changes in value of investments which occur between segregation and date of award if it would not be feseasible for the plan to do so. PAs can and do reject requests for retroactive adjustments in account balances which are too complicated, costly or require the plan to trace investment performance over an extended period. PA can ask the parties to provide for a division of DC assets on a going forward basis, e.g. date of divorce, without any retroactive calcuation of as a condition to approving the QDRO.

[J Simmons]

I also disagree that plan has to make adjustments for changes in value of investments which occur between segregation and date of award if it would not be feseasible for the plan to do so. PAs can and do reject requests for retroactive adjustments in account balances which are too complicated, costly or require the plan to trace investment performance over an extended period. PA can ask the parties to provide for a division of DC assets on a going forward basis, e.g. date of divorce, without any retroactive calcuation of as a condition to approving the QDRO.

Thank you, mjb. I read your post to say, essentially, that (a) PA can insist on a going forward date for segregating a dollar amount awarded rather than allowing QDROs to specify a date that has already passed and would require retroactive calculation, and (b) the PA is not responsible for market fluctuations in an EE's account between the time payout is requested and actually made.

Do you agree with QDROphile that a PA may not insist on an exact date (e.g., April 5, 2009) rather than "date of segregation" in the name of needing that clarity per IRC § 414(p)(2)(B)?

[Guest mjb]

I also disagree that plan has to make adjustments for changes in value of investments which occur between segregation and date of award if it would not be feseasible for the plan to do so. PAs can and do reject requests for retroactive adjustments in account balances which are too complicated, costly or require the plan to trace investment performance over an extended period. PA can ask the parties to provide for a division of DC assets on a going forward basis, e.g. date of divorce, without any retroactive calcuation of as a condition to approving the QDRO.

Thank you, mjb. I read your post to say, essentially, that (a) PA can insist on a going forward date for segregating a dollar amount awarded rather than allowing QDROs to specify a date that has already passed and would require retroactive calculation, and (b) the PA is not responsible for market fluctuations in an EE's account between the time payout is requested and actually made.

Do you agree with QDROphile that a PA may not insist on an exact date (e.g., April 5, 2009) rather than "date of segregation" in the name of needing that clarity per IRC § 414(p)(2)(B)?

As the Supreme Ct has stated in Engelhoff and confirmed in Kennedy, the rights of an ex spouse to retirement benefits is determined by the terms of the plan not state divorce courts, e.g., ex spouse can remain as a designated beneficiary under the terms of the plan after divorce even if state law mandates removal. If plan terms can determine whether an ex spouse is entitled to any benefits, then the plan can certainly establish rules as to how the amount of the ex- spouse's benefits will be determined. Thererfore the plan can establish its own rules as to how the plan benefits are to be divided in order to promote uniformity of administration and to minimize cost. I have seen plans that require a specific date for dividing assets to avoid mistakes and complex calculations. Some plans limit retroactrive calculations to a period not exceding one year. I think a plan could require that the DRO use a going forward date to determine asset values in the interest of providing uniform administration of the plan. Alternatively the plan coluld require the parties to pay for the cost of computing retroactive valuation dates.

In addition to the PA not being liable for market fluctuations, ERISA does not allow recovery for lost profits on participant investments because it is law of equity and a claim for lost value/profits is for money damages which is not permitted because a participant is only entitled to the benefits in his account. Helfrich v. PNC Bank Ky, Inc 267 F3d 477.