Whose Money is It? (Part 2)

In a recent post, I pointed out some of the complexity surrounding beneficiary designations in a multiple provider environment—and potential legal challenges that are likely to result upon a participant’s death when multiple, different beneficiary designations exist.

Another area with very similar concern is with Qualified Domestic Relations Orders (QDROs)

A QDRO is a court order dividing up a retirement plan balance upon divorce. A QDRO is usually a separate court order from the divorce agreement that satisfies the rules for QDROs under the tax code, as well as the plan’s procedures for determining that a domestic relations order is in fact a Qualified Domestic Relations Order. A plan must have extra diligence when a participant may have balances with more than one service provider under the plan. Those multiple providers need to be taken into account in the plan’s review and qualification process.

Let’s look at an example: An ERISA 403(b) plan uses a single provider for all contribution flow, but the plan used to use a different service provider. That prior provider used contracts requiring individuals to affirmatively elect to move their retirement funds to the new provider, and would not accept the direction from the plan’s fiduciary. Not all participants moved their retirement funds.

One such participant got divorced, and a DRO was written and sent to the plan sponsor who forwarded it to the current service provider per the plan’s qualification procedure. The order stated that the plan balance should be split 50:50 between the participant and the ex-spouse. The qualification procedure doesn’t reference specific service providers, and the current provider is not even aware that the participant has a balance with the former provider. The current provider does the 50:50 split. Nobody contacts the former provider, and that account balance is not split.

This is obviously unfair to the ex-spouse and is a violation of the court order. There is clearly liability here, but where does it fall? On the prior provider, who has no knowledge of the order? On the current provider who has no knowledge of the prior provider? It likely falls on the plan sponsor for having an inadequate qualification process for the domestic relations orders.

Plan sponsors need to ensure they have a robust and detailed process that can actually work. It is unlikely that review can be assigned to one service provider, since cooperation rarely exists to the point necessary to make this work. A third party administrator (TPA) could be a good solution serving as an independent third party to review orders and take into account all provider balances. The procedure itself should be detailed enough to allow the rejection of domestic relations orders that do not provide enough detail by service provider.

Financial professionals too should be tuned into these nuances so as to appropriately advise their clients. Waiting until lawsuits ensue is too late.


In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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