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The value of the marital portion of pension and retirement assets must be determined for equitable distribution purposes.
In matrimonial actions, the basic logic behind the need for determining the present value of an individual`s accrued pension benefit is to determine the replacement cost of that benefit. While the parties were married, there was an expectation that they would share in this benefit at retirement. Now, upon divorce, since marital assets must be distributed equitably between the parties, there is a need to determine the value of each of these assets, including the replacement cost of the pension benefit.
Once the values of all assets are determined, the parties can offset the values of these assets so that they are distributed equitably. You may view samples of our typical ERISA Pension Valuation Report or Government Pension Valuation Report by clicking these links. PERS [ Tracing-Method-Sample]
Read more about the Tracing/Segregation Method below
When calculating the present value of pension benefits, many factors affect the ultimate determination of this value. In general, if a person is young, has many years of deferral until the commencement of pension benefits and the payments begin at a later age, such as age 65, these factors will result in a lower present value.
Conversely, if the person is close to retirement age and can begin collection of benefits at a relatively young age (such as a 40 year old police officer with 18 years of service and a 20 year retirement), the value would tend to be higher because the payments commence earlier and continue for many more years.
The other major factor in determining the value is the choice of an interest rate assumption. Our firm currently uses the immediate and deferred interest rates as published by the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a quasi-governmental organization which underwrites all private pension plans throughout the country and provides a fair and impartial source of interest rates.
The valuation of disability pensions is also a source of concern for matrimonial attorneys. Most jurisdictions hold that only that portion of the disability pension which was accrued due to service is subject to equitable distribution. Therefore, it is imperative to obtain all the necessary salary and credited service time from the Plan in order to calculate the non-disability portion of the pension benefit.
Lexington Pension Consultants, Inc. has been conducting pension valuations since 1982. Over the years we have compiled a data base of pension plan information and currently have over 7,000 plans on file. However, it is important that the captions on our Pension Valuation Fact Sheet are filled in as accurately as possible. The exact names and addresses of the plans to be valued are necessary, including the names and locations of any additional savings, profit sharing or 401(k) plans.
When determining the division of assets, the value of all assets must be determined, then these assets must be divided or offset against one another. In many cases, both husband and wife are entitled to retirement benefits, have a mutual interest in the marital residence, or other assets which may be held as individuals. Dividing these assets for equitable distribution purposes does not always result in an even distribution of assets.
Often, when dividing a defined benefit plan, the spouse may be entitled to a reduced portion of the benefit after the offset. The purpose of this calculation is to determine the reduced percentage of the marital portion of the defined benefit pension.
Click here for examples of offset calculations
Establishing the value of a defined contribution plan is easy. Just read the statement. If the account balance has been accumulated entirely during the marriage, the parties may use the balance for the appropriate date and decide how it is to be divided. A problem arises when there was a balance in the account prior to the marriage. A typical scenario illustrating the problem goes like this: The parties were married on December 31, 1994, and at the time of the marriage, the husband was a member of his company’s savings plan since December 31, 1989, with a balance of $32,332. During the marriage, he continued to contribute marital money into the plan. On the date the action for divorce was commenced, the balance of the account was $142,449.
Using the Subtraction Method yields a marital accumulation of $110,117. Using the Coverture Method yields a marital fraction of 66.3% (9.84 years married while employed, divided by 14.54 years employed, equals 66.3%). 66.3% of $142,449 is $94,450. Both of these methods are inaccurate when being used for equitable distribution purposes. The Subtraction Method is inaccurate because it fails to attribute the earnings on the pre-marital balance to the pre-marital portion. The Coverture Method is inaccurate because the coverture fraction is determined by years of marriage and service, not the rate of contribution or earnings. If the participant had been employed for a longer or shorter period of time, it would have affected the coverture fraction, having no direct relationship to the actual amounts accumulated during the marriage. Unfortunately, if the records are not available, either of these two methods may be the only viable alternative.
Utilizing the Tracing Method is without a doubt, the most accurate method to determine the marital and non-marital portions of defined contribution plan accounts. This method examines the actual investment experience of the account during the whole marital period. Any earnings or losses are determined on a proportionate basis from quarter to quarter. Also, any loans or distributions which were made during the marital period can be properly accounted for. As shown in our example, the parties took a $30,000 loan in June of 2000. The actual marital portion of this account is $73,335, with the original pre-marital balance having grown to $69,087. Click here to view an example of the Tracing/Segregation Method.