In order to divide fairly, in a divorce, the retirement plan benefits/accounts accumulated during a marriage, the couple and their advisors must understand the different types of retirement plans. Defined contribution plans create individual accounts for the participants; defined benefit plans create retirement benefits for the participants (sometimes shown as individual accounts in defined benefit plans known as cash balance plans).
In this Blog, we will focus on the major issue which faces a fair division of retirement benefits accrued in a non-cash balance defined benefit plan. Benefits payable from a defined benefit plan are calculated via a formula. That formula, typically, will bring together the participant’s compensation, the participant’s plan service credits, a rate of benefit credit per year of service credit, and the age at which the benefit is expected to commence.
For example, the plan formula for benefit calculation might be 1.5% of final average pay (the average of the highest 5 years in the last 10 years of service) times the number of years of service credits, payable monthly from age 65. So, a participant with 20 years of service at 65 will have earned a monthly retirement benefit equal to [30% of final average annual pay] divided by 12.
Therefore, the issue to be deliberated is do we divide the retirement benefit earned as of the date of the complaint, or do we divide the retirement benefit earned (or projected to be earned) at 65, prorated for the relationship between the years of service credits during the marriage and the years of service credits earned (or projected to be earned) at 65. It is not unusual to find that benefit projections properly prorated will result in a larger share for the non-participant spouse.
- Retirement Benefit earned at date of complaint=$1,000 per month
- Retirement Benefit projected at 65 =$3,000 per month
- Years of service credits earned during the marriage=10
- Years of service credits projected at 65 =20
- Retirement benefit to be divided (non-projected) =$1,000 per month
- Retirement Benefit to be divided (projected) =$1,500 per month
($3,000 times 10/20)
When a marital estate involves one or more retirement plans, the issues needing deliberation are manifold. With guidance, each deliberation will result in a fair division of retirement plan assets.