QDRO (How are gains and losses calculated)

[Mark]

Hello,

My divorce decree states that ex-wife will receive XX dollars -  plus investment experience (earnings, gains and losses) on such amount based upon investment performance from the Plan valuation date immediately preceding the date of the parties' Judgment of Absolute Divorce until the Plan valuation date immediately preceding the date of distribution.

My ex-wife never submitted a QDRO.  It's been 7 years.  How are earnings, gains and losses calculated?  who would do that?  does she have a time limit to submit the QDRO?  I'm just nervous because I would like to know what my retirement balance is going to be.

Thanks!

[QDROphile]

Assuming that your retirement plan is a defined contribution plan, such as a 401(k) plan:

After the plan determines that a domestic relations order submitted to it for purposes of dividing the benefit is a qualified domestic relations order (QDRO), the plan will establish a sub account for the alternate payee (your ex) and determine the initial balance of that sub account in accordance with the description in the QDRO, which should mirror the description in your divorce decree. How the plan will accomplish this depends on what service provider handles the accounts and the investment management. The large commercial operations (Vanguard, Fidelity, Schwab, various insurance companies) typically use algorithms to bring forward the initial balance of the sub account as of the date of the divorce decree to account for the investment results up to the point that the sub account is actually established. Once the sub account is established by subtraction from your full account balance, the sub account takes care of itself with respect to earnings and losses, and your remaining account is unaffected going forward. The “until … the date of distribution” language becomes irrelevant to you.

One problem with delay is that it makes bringing forward investment earnings more difficult. Worst, if in the interim the plan changes its investment provider, the usual methodology for bringing forward investment earnings will not work in many cases because the new provider will not have adequate records and information for the account in the time before the change in providers occurred and will not be able to do the calculations from the date of the divorce decree through the date that the new recordkeeping began. If that happens, you and your former wife may have to figure out your own way to estimate the your balance as of the date of the divorce and the investment earnings on the amount awarded to the alternate payee going forward until  date sub account is actually established.

I use the term sub account to be technically correct. The account for the alternate payee will look like a regular account for the alternate payee, and will function as such in almost all cases. My use of the term investment earnings includes both earnings and losses.

If your ex was clearly assigned the responsibility for preparing and submitting a domestic relations order to the plan, at some point your ex’s ability to enforce the divorce decree terms could be compromised to some degree. That means that any difficulties in trying to comply with the terms of the decree through a domestic relations order could fall more heavily on your ex. But everyone will be burdened by the mess.

[david rigby]

19 hours ago, Mark said:

does she have a time limit to submit the QRDO?  

In addition to the above excellent comments, the answer to your question is YES.

[Artie M]

Agree, not aware of any federal law that contains a time limit for obtaining or filing a QDRO, though there may be legal or procedural issues under state law if the parties delay too long  in obtaining or filing one.

[fmsinc]

First of all it is HER share computed at the Valuation Date that will be adjusted for gains and losses from the Valuation Date to Distribution Date.  Your remaining share at the Valuation Date and deposits that you and your employer make to your account after the Valuation Date will not factored into the calculations.

The calculation of her share will be made, if at all, by the Plan Administrator. 

Having said that, however, IRA Custodians cannot or will not adjust for gains and losses.  Most of them have their own forms that make it very clear that if the IRA Retirement Benefits Order directs that the Former Spouse will receive $100,000,  and seven years go by, she still gets $100,000  Gains and losses are disregarded. 

TIAA CREF has taken the position that it will no longer adjust for gains and losses.   The Valuation Date in all cases will now be the "Transfer Date", that is, the date on which the payment due to the Alternate Payee is segregated by the Plan into a separate account for the use and benefit of the Alternate Payee. 

A problem has recently surfaced when Plan Administrators have outsourced the QDRO review and approval functions to a Third Party Administrator (“TPA”) (e.g. Fidelity, MassMutual, Vanguard, Voya, Alight, Empower), or has changed TPAs between the Valuation Date and the date of distribution to the Alternate Payee.  The TPA will not have the historical records available to adjust the amount due to the Alternate Payee for gains, losses and investment experience from and after the Valuation Date.  It will only be able to make such adjustments from and after the date that it became the TPA.  

But will the parties be able to compute gains and losses themselves?  On the TSP website the parties can compute the gains and losses by using the online program at https://www.tsp.gov/share-price-history/

In my home state, Maryland, the case of Reynolds v. Reynolds, 216 Md. App. 205, 85 A. 3d 350 (2014) discusses the proof necessary to prove the increase in value of the  wife’s IRA from the date of marriage to the date of divorce.  Said the CSA: 

        "The trial court found that Wife's IRA was worth $30,443.28 when the parties were wed and $133,519 at the time of trial, but there were no records indicating the account's balance during the intervening time. Wife proffered evidence of the rate of return on U.S. Treasuries and argued that the trial court should impute at least that rate to the $30,443.28 IRA balance when the parties were wed, and so find that approximately $64,000 of the balance at trial was non-marital property. The court, however, reasoned that it was unclear whether the IRA contained U.S. Treasuries, and found that "it is not clear that the treasury bill rate is an accurate reflection of the growth that may have occurred in this account." The court concluded that it "was not willing to speculate" that the U.S. Treasury rate reflected the IRA growth, and therefore it found that the non-marital portion was exactly $30,443.28.

        "We agree that a trial court could, in principle, attribute a reasonable rate of return to assets, and that the rate on U.S. Treasuries would be a conservative estimate of returns for nearly any asset. But the present case required the trial court to reconstruct accounts long neglected and lost and factor in possible losses, withdrawals, and deposits, of which there remained no record. Such complex financial accounting was beyond the scope of the court's ordinary fact-finding ability, and it required expert testimony, which Wife did not provide. See Gallagher v. Gallagher, 118 Md.App. 567, 578-79, 703 A.2d 850 (1997), cited in Walker v. Grow, 170 Md.App. 255, 273-77, 907 A.2d 255 (2006). We therefore conclude that the trial court did not abuse its discretion when it took account of its own limitations and refused to speculate as to matters beyond its knowledge."  (Emphasis supplied.)  I have a stockbroker friend who has used the Trusuary rates to make such computations. 

Other options include taking the value of the Alternate Payee's share as of the Valuation Date and using an average of the Dow Jones Industrials, the NASDAQ, the S&P 500 and the Moody’s bond rate as of Valuation Date and as of the current Distribution Date.  Apply the average of the yearly percentage changes to the Alternate Payee's share from the Valuation Date to the Distribution Date and you have the amount due to the former spouse. I have done this many times.  It always seems to work out to 5.X%. 

If is possible that the Alternate Payee's share is defined as a percentage as of the Valuation Date and that the Participant (and his employer) never makes any further contributions to the account.  In that event gains and losses will self adjust. 

Even if the Alternate Payee's share is defined as a hard dollar amount as of the Valuation Date, and that Participant (and his employer) never make any further contributions to the account, you simply divide the Alternate Payee's share by the total in the account as of the Valuation date and create a fraction what will then automatically adjust for gains and losses.    

But all of these options ignore what can happen in those 7 years. Read my attached Memo "Consequences of Delay".  Your ex is the one who is potentially in trouble.  Make sure you have names someone other than your ex-wife as the beneficiary of your account if you die.  You would be surprised how many people divorce and never remove their former spouses as their beneficiary. Whoops.

Good luck.

David

CONSEQUENCES OF DELAY 02-14-2025.pdf

[fmsinc]

Responding to Artie.  There may be no Federal law, but there are many of State laws and Rules of Procedure that will restrict the court's right to enter a QDRO:

(a) if a QDRO is deemed to be a debt and if a state statute of limitations restricts the time within which a suit to collect a debt can be filed.

(b) if the doctrine of laches applies

(c) if the court failed in the Divorce Decree to reserve jurisdiction to enter a QDRO and the 30 days to file a Notice of Appeal has expired. 

(d) if the Participant has died with no QDRO ever having been entered or approved by the Plan Administrator

(e)  see my Consequences of Delay memo.

(f) another issue is whether or not  lump sum QDRO can supersede a prior election by a Participant under Secure 2.0 to terminate his employment and take, for example, a 10 years certain payout with no joint and survivor benefits to the Alternate Payee.   

(g) and it might happen that the Agreement and/or the Divorce Decree award the Alternate Payee a benefit from the Participant's employer, Northrop Grumman, without mentioning which of N/G Plans they are talking about. See attached.   

and BTW there is no Federal law that requires a plan to make a distribution of defined contribution plan benefits to an Alternate Payee in the form of an immediate lump sum. They can require the Alternate Payee to wait until the Participant retires and goes into pay status.  Very popular with legal and accounting firms. 

NG Plans.csv

[JM]

Hello Mark,

If the plan has records going back to the award date (which if they changed record keepers then they may not have them all), but if they do then the QDRO will put the burden of the investment gains/losses calculation the plan itself (which is where Fidelity/Vanguard/Empower comes in).   However, just letting them do the calculation is ill-advised.   I have testified on this very issue in CA courts that Fidelity/Vanguard/Empower methodology for making this calculation (as others have alluded to above) is flawed.   If the market has returned gains then it would be in your favor, if the market has returned losses it would give you more of the losses.   Regardless, it is not as accurate as you would expect and therefore I would recommend having someone manually calculate the current award and then revise the QDRO to match.  That way you see the amounts now BEFORE you enter into the court order (QDRO).

[QDROphile]

The algorithms for calculating gain and loss may not be perfect. But how much would perfect cost? You have the cost of the expert. Somebody has the cost of going back to the court to obtain a domestic relations order that has a different formulation than in the divorce decree, which means arguing to the judge if the other party opposes the departure from the divorce decree terms. I am not advocating one way or another, but consider how much money and how much difference is involved before working against a well-established system. Also, the time lag involving calculation and approval by the court and submission and approval by the plan will mean that earnings and losses will have to be brought down through the time that the domestic relations order is determined to be qualified and the alternate payee sub account is established – if you want perfect.

[JM]

The case I was brought in on in LA cost the client $800 to do the 14 year calculation (from their date of separation to current), and the delta on what Fidelity paid the alternate payee vs what they should have was almost $100k difference.  The intended judgment was simply for AP to get a $400k from 14 years ago adjusted by gains/losses...Fidelity did their very quick method of allocating gains/losses which yielded $100k less to AP than what it should have been (because Fidelity improperly weighted the contributions in favor of P over that time period).  I was brought in to show the court that the AP was not trying to reach over the fence and take what was not awarded to them, I showed everyone the AP did not receive as much as was intended by the court and parties 14 years prior.  P agreed Fidelity's calculation was inaccurate and the amended QDRO was entered.   I'm not implying this case will have a similar outcome but it's not that costly to update and in my opinion well worth the extra money to ensure accuracy.  It can be much more costly to have to go back and fix everything if post-Fidelity calculation the AP (or the P) discovers things were not done as accurately as one would hope!

[Mark]

thanks everyone for the great information.  Ideally I wish my ex would have done the QRDO right away.  I would have!  I would want what was agreed on right away.  It's hard to plan for my retirement when I don't know what my exact number will be.  It sounds like it may be worth it for me to wait until I am closer to retirement before maybe asking a court for her to comply.

[QDROphile]

JM:  Certainly a 14 year lookback is a potential multiplier, and is one of the factors that figures into the consideration. Another consideration is the award amount at the division date. For a lot of folks $400K is  big number to be multiplied.

Thank you for responding with an explanation that went with a real life  illustration.

Don’t get me started with Fidelity and its approach to QDRO servicing.

 

 

[QDROphile]

Mark: Nobody was advising you what to do or not to do.

[JM]

QDROphile...completely agree!