Our Blog Aims to Inform the Community Contact the Columbia Family Law Group with Any Questions You Might Have

The Difference Between Defined Contribution vs. Defined Benefit Retirement Plans

Sounds like a boring blog post right? Perhaps, but if you have a retirement account and are thinking about getting divorced this is important information you need to know.

The most common example of a defined contribution plan is a 401(k) plan. The employee makes pre-tax contributions into an account maintained in his or her own name. The employer makes contributions of a fixed percentage of the employee's salary into the account. There is no guarantee as to how much money will be in the account when the employee retires. It completely depends on market conditions and how the investments do over time. The only thing that is guaranteed or "defined" is the amount that the employer contributes to the employee's account.

By contrast, in a defined benefit plan, there is no specific account maintained separately for a particular employee. There is a trust fund for all employees who participate in the plan. As employees accumulate years of service they earn credit towards their retirement. A traditional pension plan is the most common type of defined benefit plan. The part of the plan that is guaranteed or "defined" is the amount that the employee will receive at the time they actually retire.

The type of retirement plan that you have matters because oftentimes parties and attorneys do not specify in divorce agreements which type of retirement plan the employee really has. This is important because you need to know what you are really dividing. Are you dividing monthly payments in the future or a portion of an account with an identifiable balance that is fluctuating over time? How are earnings and losses on defined contribution plans handled? Do both spouses share in the earnings and losses or does the employee take all of the risk with the spouse receiving a set dollar amount from the account? A wise divorce lawyer would make sure that the spouse receives a percentage of the account so that she shares in the earnings and losses of the account. How are loans against the retirement account handled? How are surviving spouse benefits and cost of living increases handled with defined benefit plans? If one spouse has a defined benefit plan and dies before actually reaching retirement then the other spouse may get nothing which is an important distinction when it comes to retirement planning. The bottom line is you need to know what kind of retirement plan you have so that you know what factors to consider when it comes to reviewing those divorce settlement documents.

For more information related to retirement and divorce contact a good attorney at columbiafamilylawgroup.com.