Pensions, Defined Contributions and Divorce
This plan is one in which the contributions to the plan are known (defined). The amount of money to be distributed upon retirement is unknown and is depends upon the manner in which the yearly contributions have been invested, and the investment growth experienced over the years.
Example: The employee and/or the employer contributes yearly into the plan a fixed percentage of the employee's earned income each year. The money contributed to the plan is used to purchase stock, bonds, mortgages, certificates of deposit, treasury notes, etc. The value of these investments, and the interest generated thereon, will be distributed to the employee in one lump sum upon retirement. Upon receiving this lump sum distribution, the employee usually purchases an annuity which provides him with a specific monthly income for life.
How Defined Contribution Plans are Valued
The value of a benefit under a Defined Contribution Plan on any date is the sum of the market values of all investments in the plan on that date. The services of a pension appraiser normally would not be required to determine the value of this type of plan, unless a coverture fraction needs to be applied to the value or opposing council needs confirmation of the value. In most cases, the administrator of the plan can advise the employee as to the market value of his share of the investments in the plan on any specific date.
On April 1, 1996, Mr. and Mrs. Jones separated. Mr. Jones had been enrolled in a Defined Contribution Plan. The benefit he is entitled to receive has vested but not matured. On June 1, 1996, you request from the plan administrator, the value of the plan as of April 1, 1996. The administrator replies that Mr. Jones' share of the plan was worth $40,000. For equitable distribution purposes, the present value of Mr. Jones' plan on April 1, 1996 was $40,000 unless a coverture fraction is applicable.
Resources & Tools
MANY MODELS -- 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.
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