Who gets what in a divorce action is rarely an easy question or a foregone conclusion. Interestingly, of all the holdings acquired during a marriage, psychologically and financially, the assets most difficult to divide are retirement funds.
Why? You might ask. Unlike a home, no one can be personally attached to a retirement fund. You cannot hold onto memories of putting up a bookcase or planting your first rosebush or have the pride of first ownership. So, you might ask, what is so difficult about discussing the division of a retirement account or accounts?
To answer this question, we first have to understand that retirement holdings come in different forms. There are contributory plans such as 401k(s), 403B(s), and IRA(s). There are also defined benefit plans (typically known as pensions or annuities) which may or may not require employee contributions. Not so many years ago, employees in most major corporations had pensions, to which they did not make any monetary contributions. Today, many of these pensions have been closed. The benefit is simply too costly for many employers to maintain. The present economic instability will understandably further erode the lifespan of pensions as an employment benefit. Civil and federal service workers also have annuity plans to which they do contribute. The continuation of these plans with their guarantee of significant retirement benefits for vested employees is also somewhat questionable.
The original question still lingers — Why do couples find it so difficult to decide how to divide retirement holdings? Although the answer is somewhat elusive and clearly only based on a limited population sample, from our twenty-seven year history of mediating divorces, we at the Centre for Mediation & Dispute Resolution offer the following thoughts.
Individuals who have pensions from their employment appear to be far more attached in a personal way to their pensions than, say, to a 401k or IRA. The promise of a future monthly payment which cannot be reduced by the economic swings of the stock market or be outlived keeps many employees “loyal” to a company. Pure and simple, the pension provides a guarantee of moneys in retirement, a guaranteed sense of security. It is this guarantee and the employee’s sense of attachment to his/her ownership of its rights as belonging solely to him/her which helps to form the personal attachment. For many employees, this pension is theirs, and only theirs, regardless of marital law’s deeming individual pensions acquired during the marriage as marital property, at least the part earned while married.
Contributory retirement plans present a different kind of complexity. Couples are often surprised to learn that funds can be transferred from one spouse to the other without being a taxable event as long as the funds remain in retirement holdings. But what about couples who want to trade assets? For example, what if one spouse wants to keep the house and the other keep the retirement funds? Easy, right? Maybe not. Here many individuals question whether funds that will, in the future, be taxable upon withdrawal are equal to holdings that have no or limited tax impact. There appear to be different answers to this question. Some argue that because the funds have the distinct advantage of being able to grow tax free, they provide a greater return despite the future taxability. Others believe that the funds should be discounted precisely because of future taxability. The answer obviously depends on when you will retire and the stability of the investments prior to retirement, as well as your tax bracket after retirement. This is clearly a very complicated issue.
At the Centre for Mediation & Dispute Resolution, the fate of retirement holdings is one of the key issues to be resolved in divorce mediation. We believe that an understanding between the parties of their options helps to diffuse some of the psychological tensions and pulls surrounding retirement holdings. For example, individuals need to understand the different ways pensions can be divided or retained by one party. After all, a couple can agree that one person will retain a pension but the other one will have survivorship rights. Even this kind of agreement needs to be thought through and carefully crafted to be sure that the agreement does not become undone by remarriage without both parties’ knowledge and approval. Then, too, couples need to “play out” different scenarios, projecting their future retirement benefits including social security.
The secret of structuring an agreement that is acceptable to both parties, as workable and fair, lies in the mediator’s ability to help the couple inspect the personal advantages and disadvantages of different divisions on each individual. Together the couple works to understand intrinsically and extrinsically the impact of their decision-making on each other’s future and financial well-being. Herein lie the clues to the so called win-win solution.