Often in divorce cases the retirement assets are the most financially significant ones, and cause a great deal of negotiations and back and forth as the Participant (the one who is receiving the benefit) does not want to distribute a portion to the other spouse (Alternate Payee), and tries to hold on like the captain going down with the ship.
There are many types of retirement assets, but they basically fall into 2 categories:
1. Defined Benefit Plan;
2. Defined Contribution Plan.
A Defined Benefit Plan is what we think of as the traditional pension. One day, after many years of service, you receive a specific monthly payment. This is the defined “benefit”.
A Defined Contribution Plan generally tends to be some type of deferred compensation such as a 401k or 403b. In this plan, the employer and/or employee each contribute a certain amount of money. At the time of retirement, you do not know what the value will be, as it is dependent on the stock market and how the funds have been invested.
From reading the newspapers, we are aware of a local hospital that has not able to fund its defined benefit plan, and a large multinational corporation with a local presence trying to “cash out” its pension plan. What this means is that if your company promised you $1,000/ month for life, an actuarial calculation will be made to determine what the present value of those payments. That is, how much money would you need today to fund your pension? The company then sends you a check for the value of your plan and, like the Terminator, wishes you a “hasta la vista”.
What if you were supposed to receive half of your spouse’s pension and there is none? There has not been a lot of judicial review of this situation, but I believe that half of zero is zero. In other words, you may both be out of luck.
What if your pension is cashed out and instead of your former employer sending a monthly payment to your ex, you now have all of the money? Talk to your lawyer immediately! If your ex was supposed to receive half, chances are, she is entitled to half of the cash payment.
What if you waived your interest in another asset (such as the house) and now your pension plan has gone belly up? Chances are that you will not be able to revisit your decision, and you now have no house and no pension. It is very important to consider all of your risks when you put all of your eggs (financial planning) in one basket.
Don’t make emotional decisions about your financial future. Like the captain of the Titanic, going down with the ship may not be all that it is cracked up to be.
November 2019 Margaret Tabak