- Deal or No Deal
- February 4, 2010 | Author: Dorothy A. Voigt
- Law Firm: Schiller DuCanto & Fleck LLP - Chicago Office
- The State of Illinois recognizes that retirement benefits are marital assets, which makes them subject to division between spouses. Often a substantial portion of the marital estate consists of the Retirement Benefits. Thus, when a couple divorces, it must be determined how to divide up the retirement plans.
Let’s look at a hypothetical negotiation about retirement benefits. The parties are both age 50 upon divorce. Wife has a Defined Contribution 401(k) Plan with a balance of $80,000. Husband has a Defined Benefit Plan with an accrued benefit of $80,000. It would appear their benefits are equal. If each keeps their own benefit, it would simplify the divorce because no additional paperwork would need to be prepared to divide the retirement benefits.
However, the husband’s benefit plan statement shows that the sum he currently has accrued will pay a benefit to him of $4000 a month at age 65 for the rest of his life. This calculates out to $48,000 a year. He would receive a total of $80,000 in benefits over the course of 20 months. If he lives 10 years, the value of his benefit is $480,000.
In the meantime, the $80,000 in the wife’s 401(k) account will increase or decrease depending upon market fluctuations. If she manages a compounded growth rate of 3% over 15 years, the total value of her account would be approximately $125,000 when she reaches age 65.
Therefore, the deal of each keep your own benefit is no deal for the wife at all.
If the parties were to split the benefits 50/50, then the Husband would receive $40,000 from the wife now and in exchange the wife would receive the right to obtain $2000 a month for life at age 65. It would well be worth the investment of $40,000 now to obtain $240,000 over the course of 10 years in the future (or more if she lives longer). The parties would have to prepare Qualified Domestic Relations Orders (“QDRO”) to split the benefits and give their ex-spouse an interest in their respective plans.
Let’s vary the scenario a bit. The parties are still both age 50 upon divorce. Wife has the same Defined Contribution 401(k) Plan with a balance of $40,000. Husband has the same Defined Benefit Plan with an accrued benefit of $80,000. The Husband proposed providing $20,000 to the wife so that each has benefits worth $60,000. However, the Husband’s plan will not allow him to remove funds at this time. So instead, to equalize the retirement benefits, the Husband gives the wife an additional $20,000 from another asset.
The Husband’s plan is still worth the sum of $4000 a month to him at retirement. The wife will have $60,000 which again with a compounded growth rate of 3% over 15 years will be worth approximately $94,000.
Again, the deal requiring equalization of benefits is no deal for the wife either.
The reason the result of a apparently equal benefit exchange is so different is because we are comparing apples to oranges. There are substantial differences between a defined contribution plan and a defined benefit plan. The accrued benefit in a defined benefit plan is not the value of the plan, whereas the value of the 401(k) plan is the statement balance. See In re Marriage of Mantei, 222 Ill.App.3d 933, 583 N.E. 2d 1192, 164 Ill.Dec. 870 (Ill App. 4 Dist., Dec. 19, 1991).
Therefore, before you agree to settle your case, be sure that you know exactly what the benefits you are dealing with are worth.
Knowledge is power, so the more you know about the retirement plans that both you and your spouse have, the better prepared you are to discuss an appropriate settlement and decide if it is a deal or no deal.
Please consult an attorney if you have any questions.