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QDRO Valuation Date


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We are running into a situation with our recordkeeper involving the valuation date for QDROs.  In the past a determination date was some date in the past chosen by the participant and alternate payee, and was usually the date the participant and spouse were separated or divorced.  The AP's account was then valued by taking the balance as of the determination date, adjusting for earnings, contributions, withdrawals or whatever, and then splitting the account.  The APs account could then be administered just like any other account; payment could be requested or deferred, investments chosen etc.

Now the recordkeeper has unilaterally decided that the valuation date is the date of transfer so there are no earnings calculations needed.  This is not what our QDRO procedures or models provide and we have a number of DROs in process which are expected to stipulate the prior method when they are submitted to us for approval.  We are getting pushback from participants who want to divide the account based on a specific past date and who are unequipped to calculate several year's worth of investment earnings on their own.

The recordkeeper is calling their new process "industry standard" but in my years in the industry as a TPA the majority of my cases have used the prior method.  Do agree this is industry standard?  I have not been a TPA in 10 years so perhaps the industry has moved on without me knowing?

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I agree this doesn't seem right.  Is this coming from someone with authority?  The DRO will usually refer to the valuation on or closest to the determination date. The valuation date is the valuation date, whether it is daily valuation, annual valuation, or whatever it is.  If it is on a RK platform, it is probably daily val right?   

I don't see how an RK could argue that they can simply ignore gains and losses pursuant to a court order.  And if they are saying they can't do it, it is even more problematic.

 

 

 

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For an ERISA-governed retirement plan, a domestic-relations order is not a qualified domestic-relations order unless, with other conditions, the “order clearly specifies— . . . the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined[.]” ERISA § 206(d)(3)(C)(ii).

Since 1984, recordkeepers have tried—sometimes subtly and sometimes unsubtly, and with varying degrees of success—to push divorce practitioners and unadvised litigants into writing orders that call for the alternate payee’s percentage to be applied on the day the plan’s administrator (or its service provider) implements the order.

That’s because an order that calls for a division as of a date in the past, with some measure of investment results after that date, is a pain-in-the-assets for a recordkeeper’s services.

A plan’s administrator, if it obeys the plan’s governing documents and applicable law, must not ignore what a court’s order provides if the order is a qualified domestic-relations order. But what a plan’s administrator must do might not be the measure of what service a recordkeeper is obligated to provide.

As RatherBeGolfing suggests, consider making sure the information you read or heard truly is the recordkeeper’s work method. Also, consider whether you want a candid conversation about whether it might be wise (or unwise) to edit the plan administrator’s DRO procedure and model form of court order (if you furnish one) to fit more closely the work methods the administrator and the recordkeeper agree on.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Important: if there are any transactions (e.g., EE contributions, ER contributions, withdrawals, loans) after the retro date, applying the AP's percentage at some later date (assuming this is an individual account plan) may produce an incorrect split.  Read the QDRO order carefully and take this issue into account whenever reviewing a draft QDRO.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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6 minutes ago, Peter Gulia said:

A plan’s administrator, if it obeys the plan’s governing documents and applicable law, must not ignore what a court’s order provides if the order is a qualified domestic-relations order. But what a plan’s administrator must do might not be the measure of what service a recordkeeper is obligated to provide.

Agree with Peter. I think this is the PA's problem, not necessarily the RK's obligation. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I often suggest that a plan’s administrator (and those who advise it) not reflexively imagine that a service provider does everything. And I often suggest that a service recipient gets more useful services when the recipient is mindful of and considerate about the provider’s business needs, practical needs, and constraints. When there is a candid working relationship between the plan’s administrator and its recordkeeper, there often are shared opportunities for improvements, with both recipient and provider benefitting from their exchange of information.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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50 minutes ago, Peter Gulia said:

I often suggest that a plan’s administrator (and those who advise it) not reflexively imagine that a service provider does everything. And I often suggest that a service recipient gets more useful services when the recipient is mindful of and considerate about the provider’s business needs, practical needs, and constraints. When there is a candid working relationship between the plan’s administrator and its recordkeeper, there often are shared opportunities for improvements, with both recipient and provider benefitting from their exchange of information.

If the RK cannot or will not provide the services required (in this case to comply with the terms of the QDRO), does this create a fiduciary issue?  At a minimum, I would think this would need to be taken into consideration as part of the process of monitoring current service providers...

 

 

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20 hours ago, EPCRSGuru said:

The recordkeeper is calling their new process "industry standard" but in my years in the industry as a TPA the majority of my cases have used the prior method.  Do agree this is industry standard?  I have not been a TPA in 10 years so perhaps the industry has moved on without me knowing?

No, this is not industry standard. With a daily valued platform, the prior method should not be that hard to calculate. And unfortunately, a DRO is not always submitted to a plan administrator shortly after the date of divorce. We've, on occasion, gotten orders many years after the divorce to qualify. Then what?

I appreciate Peter Guilia's practical remarks. We often advise clients to check with the recordkeeper before implementing certain plan provisions to minimize possible operational failures, but we don't like it. This is another area where recordkeepers force plans into their pre-determined computer programming boxes because it's easier for them. It's also in line with the IRS approach over the last 20 years to force the standardization of all plans. I miss the good old days where plan design could be tailored to the sponsor's needs by legal counsel (limited only by the law), recordkeepers could provide an individualized approach customized to the plan and the sponsor's needs, along with personal customer service, and accountants could advise on the tax aspects. I guess I'm showing my age. 

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It is rare to see a Plan Administrator or a TPA prepare Plan Procedures required by ERISA Section 206(d)(3)(G)(ii) or Model Orders that do not address a "Valuation Date" and whether or not gains and losses are to be included from the Valuation date to: (i) the date of a rollover to the Alternate Payee's IRA or other eligible retirement account; or (ii) the date a taxable distribution is made to the Alternate Payee; or, (iii) the date that the Alternate Payee's share is segregated to an account for his/her benefit. 

Here is my Memo that might be helpful.  

It is noteworthy that many Plans will not or cannot compute gains and losses.  IRA custodians rarely do.  The law that can be read to require them to do so is ERISA § 206(d)(3)(C)(ii) that clearly allows a DRO to specify the method of determining the Alternate Payee's share. 

"(ii)the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,"

I have engaged in pretty heated battles Fidelity who try to require that the amount to be transferred must only be a hard percentage or a hard dollar amount, neither of which will be adjusted for gains and losses.  It was almost embarrassing to have to cite the above ERISA section to them.     

It is also noteworthy that not all plans will value their portfolios and the Participant's share thereof on a daily basis.  Many do so monthly, quarterly, or in a few cases only on December 31st. 

The parties select valuation dates at the date of separation, or the date of divorce, or the date of actual distribution, or at other random dates.  It often depends on State law.  In Maryland, for example, the court values marital property for equitable distribution purposes on the date of the final divorce merits hearing.  In Virginia, the accumulation of marital property stops on the date of separation.  So as you might expect, in Maryland the Valuation Date will be the date of entry of the Judgment of Absolute Divorce, and in Virginia the Valuation Date will be the date of separation. 

DSG    

Gains, Losses, Investment Exp - 09-29-2022.pdf

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On 6/22/2023 at 8:45 AM, RatherBeGolfing said:

I don't see how an RK could argue that they can simply ignore gains and losses

Plus, there have likely been contributions made since the separation/divorce date.  Those would need to be backed out, no?

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I've had to spend hours calculating gains back to 2009 for a 2014 QDRO.  It's not fun even when the recordkeeper spits out the participant's full transaction history.  The market loss cost the AP $1,000 due to some lousy trading by the participant.

It's not a bad idea to let the lawyers know how much of a processing fee it might take to split this stuff perfectly, and perhaps they instead agree to a round number unadjusted and say, close enough.

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Bri, do some clients’ plans provide that such a fee is allocated to the participant’s account, the alternate payee’s segregated account, or some combination of them?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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30 minutes ago, Peter Gulia said:

Bri, do some clients’ plans provide that such a fee is allocated to the participant’s account, the alternate payee’s segregated account, or some combination of them?

I have seen QDROs that specifically mention which or both parties pay all such fees from their benefits.  That presumes the plan allows it.  

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I too have seen (indirectly) many orders that split a QDRO-processing fee between the participant and the alternate payee.

But those charges have been for a fixed fee based on routine processing, not “hours” of calculations.

If a QDRO-processing fee to be charged against individuals’ accounts is time-based, I like Bri’s point about inviting divorce lawyers and unadvised litigants to consider how an order’s provisions might affect expenses allocated to the participant or alternate payee.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I suggest keeping a copy of the Department of Labor's publication QDROs The Division of Retirement Benefits Through Qualified Domestic Relations Orders readily available.

A DRO can be rejected by the plan administrator if the DRO places an undue administrative burden on the plan.  For example, we have successfully had DROs redrafted to specify dates that are consistent with the plan's valuation frequency where the plan was or is not daily valued.

 

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DOL, EBSA, Field Assistance Bulletin 2003-3 (attached) provides: 

        Qualified Domestic Relations Orders (QDROs) and Qualified Medical Child Support Order (QMCSOs)
Determinations.

"ERISA does not, in our view, preclude the allocation of reasonable expenses attendant to
QDRO or QMCSO determinations to the account of the participant or beneficiary seeking the determination."

"It should be noted that, pursuant to 29 CFR § 2520.102-3(l), [https://www.law.cornell.edu/cfr/text/29/2520.102-3] plans are required to include in the Summary Plan Description a summary of any provisions that may result in the imposition of a fee or charge on a participant or beneficiary, or the individual account thereof, the payment of which is a condition to the receipt of benefits under the plan. In addition, 2520.102-3(l) provides that Summary Plan Descriptions must include a statement identifying the circumstances that may result in the ". . . offset, [or] reduction . . . of any benefits that a participant or
beneficiary might otherwise reasonably expect the plan to provide on the basis of the description of benefits . . .
"These requirements are intended to ensure that participants and beneficiaries are apprised of fees and charges
that may affect their benefit entitlements."

29 CFR §2520.102-3(l) also provides: 

 "Plans also shall include a summary of any provisions that may result in the imposition of a fee or charge on a participant or beneficiary, or on an individual account thereof, the payment of which is a condition to the receipt of benefits under the plan. The foregoing summaries shall be disclosed in accordance with the requirements under 29 CFR 2520.102-2(b).

Note that if review and processing fees are not set forth in the SPD, the Plan cannot charge them.  

Note that the above does not apply to defined benefit plans.  

Note that most Plan Procedures allow the QDRO to set forth the allocation of such fees between the parties, but provide for a default if no such allocation is specified.  

DSG

QDRO - Fees Charged to Review QDRO - Field Assistance Bulletin 2003-03.pdf

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Following back up with Peter, the DOL annual fee disclosure provided to participants would typically list a larger "distribution processing fee" (compared to a normal termination withdrawal) assigned to the participant's account, and then the parties at hand can argue about who will actually take that hit.

(But not an hourly fee, which makes me wonder about addressing that line item on the disclosure!)

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ERISA’s 404a-5 rule particularly mentions as an example of an individual expense “fees attendant to processing . . . qualified domestic relations orders[.]”

29 C.F.R. § 2550.404a-5(c)(3)(i)(A) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.404a-5#p-2550.404a-5(c)(3)(i)(A).

While others might interpret the rule differently, I do not read it to preclude disclosing a QDRO-review charge merely because the charge is for a time-based fee.

A plan’s administrator might furnish its most recent 404a-5 disclosure when the administrator furnishes its procedure for reviewing domestic-relations orders.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 6/23/2023 at 5:26 PM, Peter Gulia said:

I too have seen (indirectly) many orders that split a QDRO-processing fee between the participant and the alternate payee.

But those charges have been for a fixed fee based on routine processing, not “hours” of calculations.

If a QDRO-processing fee to be charged against individuals’ accounts is time-based, I like Bri’s point about inviting divorce lawyers and unadvised litigants to consider how an order’s provisions might affect expenses allocated to the participant or alternate payee.

The ones I see say it as simple as:  Any fee for processing the QDRO for the plan administration shall be split 50/50. 

 

It might be a little tighter in the legalese but it is clear whatever the cost is the split is 50% each.  

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The fee has to be reasonable, and if the QDRO is complex or if the parties engage in extended negotiations that yield multiple draft DROs for review, then hourly fees are appropriate.  Having a fixed fee makes sense for a "standard" QDRO where there is one DRO presented that is drafted properly and divides the assets between the participant and one alternate payee using reasonable time frames.  If the practitioner wishes to avoid using hourly fees, consider having a fixed fee for the various parts of the process - a fee for each DRO reviewed, a fee for each additional alternate payee, and a fee for each year of data history needed.

If there was a way to do it, I would add an incompetence fee.  I am amazed at the number of DROs have the wrong plan name because the drafter used a DRO for a different client as a model and did not proof read the DRO before submitting it for review.

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