We have a lot to worry about these days — an unprecedented pandemic is sweeping our world, putting the lives of ourselves and our families in jeopardy. Beyond that, the worldwide stay-at-home orders, while saving lives, have wreaked utter havoc on economies. Not only are we suffering medically, but our lifestyles and finances are suffering as well.
In the past few weeks, the stock market has plummeted. Despite numerous attempts by the federal government to prop it up, we are still looking at a market that is bleeding. For folks on the eve of retirement, or those who are in the process of splitting a retirement account pursuant to a QDRO, the every day stock ticker updates are terrifying — all that red is almost certainly bad news for our financial futures.
I’ve already received a few inquiries from clients, asking what the effect will be on their accounts. It varies, but here are some common scenarios:
Pensioners: Not much will change, unless your employer goes bankrupt.
The beauty of a pension is that your monthly benefit is basically guaranteed, and it will even typically go up as cost-of-living adjustments (COLAs) are applied to your account. For nearly everyone who has a pension, whether they are in pay status or are still working and contributing to their plan, your account is probably safe – your payouts do not vary according to the performance of the stock market, and instead are based on a formula that accounts for things like service time, seniority, and final salary.
Now, the one exception is this: when the economy collapses, a lot of companies go out of business. Some companies have pension plans that are not fully funded, and many pension funds rely on the stock market to grow their funds so that they can support their retirees for decades to come. If your company or municipal organization goes bankrupt, they may try to escape their pension obligations. If this happens, there is a federal law and pension insurance program that will pay out some, but not all, of your pension in most cases. In addition, depending on how the bankruptcy case goes, the employer may be forced to set aside some funding to pay out pensions in part or in whole.
What about those who are doing a QDRO? The same thing applies: a QDRO just divides out a portion of that pension for the nonemployee spouse. If a QDRO is being processed while the economy is tanking, it won’t make much of a difference as the pension payout amount again does not rely upon the stock market. And if the plan goes bankrupt, both the employee and nonemployee spouse will likely see a reduction in their monthly payments when pension insurance kicks in.
Defined Contribution (401k, 457b, 403b, etc.): Look to the language of the split.
If you are currently dividing a defined contribution account – these are the accounts with cash balances that represent the amount you have contributed plus gains and losses from the stock market, such as a 401(k) – a wild stock market can affect what you get in the end. Here are a couple of examples that will make it easier to comprehend:
Person A is a nonemployee spouse and was awarded a fixed dollar amount of $80,000 out of the employee spouse’s account. No gains or losses were awarded. Because the QDRO will call for a fixed dollar amount without any adjustments for market performance, this person has very little to worry about, other than the market taking so severely that there isn’t even $80,000 left to pull out.
Person B is a nonemployee spouse and was awarded $80,000, plus gains and losses. This person does have to worry. Most of the time, the gains and losses will be measured since the date of asset valuation – i.e. the date of separation (California) or filing for divorce (New York). For this person, the last few weeks will greatly impact their current account value, as the initial $80,000 will be adjusted for any stock market gains and losses since the asset valuation date.
Person C is a nonemployee spouse and was awarded half of the marital portion of the account – with no elaboration on gains and losses (the lazy divorce lawyer language). For this person, they will probably have to worry, at least if they plan on cashing out the account soon. Most courts have ruled that, unless the agreement specifically denies gains and losses, it is assumed that the nonemployee spouse will get these gains and losses. In most times, that is a good thing – a long view of the market is that it always goes up, even with the massively bad times like the coronavirus plague, the Great Recession, etc. Not only will this person probably be subject to the gains and losses from the market, but it will also take some time to figure out what “half” means in terms of numbers – we have to calculate gains and losses on just the portion of the account that was deposited during the marriage – so they won’t even know how badly the market is destroying the account balance for a while.
Don’t guess. Talk it through with a lawyer.
I do QDROs in seven states. If you are working on your divorce or working on a QDRO and have concerns about the impact of the market on your account, feel free to reach out for free consultation we can discuss how the language of your divorce agreement might impact your QDRO and your account value. Plus, if your divorce hasn’t been finalized, we can discuss what language you might want to push for in order to ensure the next few months don’t devastate your account balance.