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The Divorce Encyclopedia
Retirement Benefits

Term Definition Retirement Benefits - compensation paid an employee after his working years are finished.
Application in Divorce Retirement benefits are a general term for direct or indirect compensation paid an employee after his employment with a company has ended. Retirement benefits may also include medical benefits.

All forms of traditional retirement benefits acquired during a marriage are divisible upon divorce.

Before World War II, most Americans worked without any company-paid retirement benefits, and for this reason, many people literally worked until they died.

At one time, when many Americans worked their entire lives at one company, retirement benefits meant the company pension, a defined benefit from which he or she was paid a monthly check for the rest of his life. For the generation that lived through the Great Depression of the 1930s and World War II, the company pension, Social Security and individual savings became a three-point arrangement that give millions of Americans a sense of well being and security in their retirement that young people today probably will not have in theirs. Usually, in this routine, the working spouse was the husband who often elected to collect reduced benefits during his retirement years so that his widow could survivor’s benefits for the rest of her life after he died. In this arrangement, the employee contributes nothing toward his own pension and does not have an individual account in his or her name.

Beginning in the 1980s, however, more and more employers began restructuring retirement benefits around defined contribution plans, wherein both employer and the employee make contributions to a retirement account in the name of the employee. In this routine, the employee manages his or her account and has a greater say in the mix or investments. Very often the employee buys stock in the company.

When defined contribution plans such as the 401(k) first became appeared, the business world trumpeted them, and during stock market runups, the paper gains in these accounts make them very attractive. However, the first generation of workers to prepare for retirement with defined contribution plans in still working, so it remains unclear whether ordinary workers in the long run will fare better or worse with one or the other plan in the long run. The collapse of the Enron Corp. provides a drastic lesson in the virtues of diversification of investments in a 401(k). Many people saw their life savings and retirement accounts vanish when Enron collapsed as result of its managers’ mismanagement and corruption.

The defined benefit pension plan seems to be headed for extinction because fewer and fewer companies are offering them, and more and more companies are freezing benefits for those employees already covered. In addition, more and more companies are trimming or eliminating retirement medical benefits for ordinary workers.

Retirement plans are said to be qualified when they are covered by ERISA and protected by the PBGC and nonqualified when they are not.

The classification and distribution of retirement benefits earned during a marriage is not difficult, but the downsizing of many large corporations through voluntary and involuntary early retirements has created particular considerations for divorce courts.

In the past generation, millions of American workers have squeezed out the work force early as a result of the continuing restructuring of the economy. Many longtime employees retire voluntarily but not by their own choice, or they retire involuntarily. Retirements under these circumstances may obscure an easy distinction between types of severance pay and early involuntary retirement benefits, particularly when a person retires early after a divorce. Sometimes early retirement benefits can see seen as compensation to an employee for a specific service, that is, retiring early. Courts face the challenge of deciding what portion of these benefits are separation pay (and separate property) and what portion are retirement benefits earned during a marriage (and marital property).

Generally, separation pay after a divorce as a result of involuntary retirement is viewed as separate property because they are seen as compensation for lost future earnings. Overall, courts may look at early retirement benefits as compensation for past service if the employee is at a high point in his or her productivity rather than a low one.

Voluntary early retirement by the pension-owning spouse creates the risk that he or she may retire for the bad-faith reasons for a larger share of the retirement pie.

See Retirement.

See also Defined Benefit Plan, Defined Contribution Plan, Qualified and Nonqualified Plan, Pension Plan; ERISA; PBGC.

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