Dividing a retirement account in divorce requires a special court order (usually called a Qualified Domestic Relations Order or QDRO). The process of obtaining and implementing one of these orders is not immediate, and requires approval by both the court and the plan's administrator. During this time, the account will change value. Accounts change in value due to market fluctuations, but also due to withdrawals, loans, and ongoing contributions. All of these changes can create havoc with a division if a clear date of division is not identified.
Consider just this simple division example:
Pat and Chris agree to divide Pat's 401(k) with Chris receiving 50%.
They don't specify the date of division, but they sign their agreement on January 2, 2019. Due to the divorce process timelines in Massachusetts their hearing date on a Joint Petition for Divorce is February 4, 2019. Their Judgment of Divorce Nisi issues on March 6, 2019, and becomes final on June 4, 2019 (their legal divorce date). They just hired their QDRO drafter (on April 1, 2019) and estimate that the time from starting their QDRO drafting to having it implemented will be approximately 4 months (for drafting, pre-approval, court approval, final approval, and implementation), with an estimated transfer of funds on August 1, 2019.
The following are the changing values in the 401(k)
January 2, 2019: $400,000
February 4, 2019: $410,000 (from 1/2/19 contributions of $1,000, approx. investment gain of $9,000)
March 6, 2019: $425,000 (from 1/2/19 contributions of $2,000, approx. investment gain of $23,000)
June 4, 2019: $436,000 (from 1/2/19 contributions of $10,000, approx. investment gain of $26,000)
August 1, 2019: $438,000 (from 1/2/19 contributions of $14,000, approx. investment gain of $24,000)
Pat has continued to contribute to the account, and investments caused a surge in the Spring, but there have been some losses in investments in July. Now consider the different resulting distribution of funds on August 1, 2019 depending on which date of division is chosen:
|Date of Valuation||Including Investment Changes||Excluding Investment Changes|
|Pat Retains||Chris Receives||Pat Retains||Chris Receives|
|Date of Agreement (January 2, 2019)||$226,000||$212,000||$238,000||$200,000|
|Date of Hearing (February 4, 2019)||$225,500||$212,500||$233,000||$205,000|
|Judgment of Divorce Nisi (March 6, 2019)||$226,000||$213,000||$225,500||$212,500|
|Judgment of Divorce Absolute (June 4, 2019)||$221,000||$217,000||$220,000||$218,000|
|Date of Transfer (August 1, 2019)||$219,000||$219,000||$219,000||$219,000|