Navigating property division during a divorce can be an emotional and exhausting journey. At times, spouses find it easier to simply split marital property equally, 50/50 not knowing that other division options may be available. Both parties are ready to close one chapter in their lives and move on. However, a rushed approach to resolution can lead to oversight on property division details. Gains and losses or market fluctuations related to a former spouses’ defined contribution plans (e.g., 401k Plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans) are often overlooked in Marriage Settlement Agreements (“MSAs”) during marital property division discussions.
Gains and Losses in Property Division
Unfortunately, it is all too often that the MSA does not contemplate gains and losses. This can lead to unintentional marital property division results such as one party receiving more from the gains or another party bearing more loss. Gains and losses are unavoidable results of investing.[1] Simply, gains occur when the current value of an asset is higher than the investor’s purchase price of the asset. Alternatively, a loss is when the asset’s value is less than the purchase price of the asset. Contributions to a retirement plan are investments made with the prospect that the plan participant will reap the rewards in gains to grow their retirement fund. In contrast, when the market takes a downturn, the investment portfolio can experience significant losses. During the last couple of years the conversations in divorce and the financial community at large tended to be about capturing the gains as we were in a period of market growth. Now the conversation has turned to the market’s volatility.
Market Fluctuations in QDROs Post-Divorce
In order to effectuate the retirement plan division for the divorcing parties, a qualified domestic relations order (QDRO) must be entered with the court which directs the plan administrators how to divide the martial portions of retirement plan assets. A period of time exists between the date of divorce (or some other specified division date) and the date of actual asset division. The retirement account will continue to experience market fluctuations during this period of time. Thus, an oversight excluding language related to gains and losses or market fluctuations is no small detail when current market conditions[2] are bearish and retirement investment accounts are decreasing in value as each day passes in 2022.[3]
In certain instances, divorcing parties may be expecting more from the QDRO assignment based on previously contemplated values in the accounts and agreed upon assets in divorce, only to find they are now assigned less due to market fluctuations. It is important to remember that retirement accounts continue to experience market fluctuations during the time between divorce and actual assignment i.e., the dollar amount on the date of segregation would be different unless a fixed dollar amount is assigned which is not subject to market fluctuations.
Any delay in entering and processing a QDRO (in some cases this may be years) can create new post decree conflict regarding the gains or losses on the marital assignment as the retirement accounts continue to experience market fluctuations during the time between divorce and actual division.
How The Court Views Ambiguous Language
The Courts treat MSA ambiguity questions as a matter of contract construction[4] and will look to the intent of the parties’ language within the agreement. Division by a fixed amount or by a percentage are two typical ways to divide retirement plans within the MSA and these assignments have differing effects in determining whether “post-dissolution gains and losses are a natural by-product of dividing marital assets with fluctuating value.”[5] Additionally, such a result is dependent on the language of the MSA and the entire record between the parties. Courts have looked at the retirement assignments and concluded that a fixed dollar amount is typically not subject to market gains and losses absent language otherwise. Alternatively, percentage of retirement account assignments have been held to be subject to market fluctuations absent language otherwise. As you can see an MSA without language directing the plan on how to treat gains and losses may lead to unintended consequences and open what was perceived as a resolved case to post decree issues. Therefore, it is always in your best interest to discuss retirement assets and the assignment thereof in a dissolution process with experienced counsel.
To discover more about how your current agreement assigns gains and losses or consulting on post decree issues, please contact our office to schedule a consultation by phone 847-926-7679 or online at our website anneschmidtlaw.com.
Norra Pe Benito
Anne Prenner Schmidt, Esq.
[1] https://www.investopedia.com/ask/answers/04/021204.
[2] Current market conditions based on when this article was written June 23, 2022.
[3] Michelle Singletary, Stock market tumble booted workers from the 401(k) millionaire’s club, The Washington Post, May 27, 2022, https://www.washingtonpost.com/business/2022/05/27/fidelity-401k-millionaires-drop/.
[4] In re Marriage of Morreale, 351 Ill. App. 3d 238, 242, 813 N.E.2d 313 (2004).
[5] In re Marriage of David, 367 Ill. App. 3d 908, 915, 856 N.E.2d 1158, 1164 (2006).