Pension and Divorce: The Differences Between Retirement Plans
Key Points
  • Not all retirement plans are created equal.
  • Employers with a defined benefit plan set aside benefits for all employees whereas the defined contribution plan is in the employees name not the name of the company.
  • It is important to understand and know which plan you are working with especially when this asset needs to be offset and/or a QDRO needs to be drafted.

Pension and retirement plans come in a bewildering array, with many diverse provisions; however, the two basic models are: the defined benefit or defined contribution. The defined benefit plan is generally a retirement annuity, wherein the employee contributes nothing and the employer sets aside benefits for all employees in a pool. The defined contribution plan is an individual or separate account in the employee-spouse's name, whereby he or she contributes pretax dollars to his or her account that are matched to a certain amount by the employer's contribution.

A defined benefit plan provides the retiree a monthly payment beginning at retirement for the remainder of his life. The benefit is based on a formula contained in the plan. The defined benefit pension is the old-fashioned company pension that gave the Depression-World War II generation a reasonable measure of security in what were at one time called the "golden years" of retirement. In this regime, the employee paid nothing into the plan, nor did he or she have a separate account. After a period of employment with ABC Co. or XYZ Corp., he or she was paid a fixed sum for the remainder or his or her life, and then his or her survivor (generally his widow) received a reduced pension upon the death of the worker-spouse, if the couple elected such benefits. The defined benefit pension, private savings and Social Security provided a three-legged stool for millions of Americans in the "take it easy" years of retirement. However, the defined benefit pension plan now goes the way of fountain pens, the afternoon newspaper and trolleys because corporate America maintains that such pensions create burdensome legacy costs it can ill-afford in a world of global competition.

The defined contribution plan now replaces the defined benefit pension plan for millions of American workers. In the defined contribution pension plan, the worker normally creates an account with both company and non-company stock. Upon retirement, the employee elects to receive a lump sum payment, or receive a monthly check in the manner of an annuity. While the employee-spouse has more freedom in the management of his or her account, the defined contribution pension transfers the burdens and risks of the plan from the company to the employee. For example, the collapse of the Enron Corporation demonstrates the dangers of lopsided investment in company stock, and the gyrations of the stock market in the wake of the collapse of the housing industry show again the vulnerabilities of Wall Street finance economics. Moreover, the first generation of workers to retire using defined contribution plans is still in the work force, so it remains to be seen how they will do long term in comparison to their parents who enjoyed the ease of defined benefit plans.

The most common defined contribution plan is the 401(k) and other similar plans include SEPs (Simplified Employee Pension Plans) Keoghs, 457s, 403(b)s.

Suggested Reading
Pension Issues in Divorce Pension Issues in Divorce
When couples get divorced they must decide how to divide their property. Retirement benefits (pensions) often form a substantial part of the parties' total marital estate and many times are the largest single marital asset afforded the couple. Similar to other assets, pensions are typically divisible in cases of divorce to the extent that they are acquired during the period of marriage.

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WIFE’S DISADVANTAGE -- Women of all ages often go into divorces on a less equal footing than their husbands and, therefore, must pay particular attention to the long-term consequences of the division of the marital estate. Women may enter and leave the work force to the demands of child rearing, which lowers their contribution to their own pension plans (if they have them), and they may, for the same reason, juggle low-paying, part-time jobs that together yield a living wage but one without benefits and certainly no pension.

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