On May 10, 2018 the Appellate Division, Third Judicial Department, in Carlson v. Dorsey, upheld the right of Suzanne Carlson’s estate to receive her Majauskas share of George Carlson’s 401(k), as specified in the Qualified Domestic Relations Order (QDRO). While this case focused on whether the provisions of the QDRO impermissibly modified the terms of the judgment of divorce, which the Court ruled that it did not, the facts of the case also call attention to some frequent misunderstandings that arise in division of pension assets.
In Carlson, the issue was whether, in the event of her death prior to the receipt of her Majauskas share of the pension benefits, Suzanne Carlson’s estate was entitled to receive a lump sum payment for any undistributed benefits payable to her under the terms of the QDRO or whether the unpaid funds would revert to the husband. This raises the question of why or how there could be unpaid funds from a 401(k), unless Suzanne’s death occurred between the time of the approval of the QDRO and the division of assets by the plan administrator. The specific use of the term “lump sum payment” indirectly suggests that there was some feasible, alternative approach to the division of the assets where they would have been paid out to Suzanne over time. This is inconsistent with the division of assets under a defined contribution plan, such as a 401(k), where assets are simply split when the QDRO is implemented, not pro-rated and paid out over time as they are in defined benefit plans.
A related question raised is why a time-based method, such as the Majauskas formula, would be used to divide the assets in a defined contribution plan. In Jennings v. Brown, the Seneca County Supreme Court observed, quoting from Brett R. Turner’s treatise, The Equitable Distribution of Property,
” ‘It is generally error to classify a defined contribution retirement plan using the time-based coverture fraction used to classify defined benefit plans. The time-based coverture fraction assumes that equal contributions are made to the plan and each (of the years) of the employee’s service. This assumption is untrue in a defined benefit plan, for the employer’s contribution to such a plan will almost always differ from year to year. To make an example; assume that an employee has twenty years of service, the first of which occurred before the marriage period. During that first year, he made a large voluntary separate property contribution of $500,000 using retirement benefits rolled over from a previous position. For the remaining nineteen years, he contributed a modest $2,000 per year. By any reasonable standard, the great majority of the retirement account is separate property. Yet, a coverture fraction approach would classify it as 95% (19/20) marital property. This situation shows, in a nutshell, why time based fractions are not applied to defined contribution plans. Classifications of defined contribution plans provide proration of funds, not proration of time.’ 2 Equit Distrib. Of Property, 3d § 6:24.”
In addition to not recognizing differences in the amounts of funds contributed over time, time-based fractions also fail to properly reflect investment experience. Money invested twenty years ago will almost certainly have had a different investment experience than money invested five years ago. But even if we assume a constant annual rate of return, time-based fractions don’t work.. Assume investments in a retirement account grow at 7% per year. Two thousand dollars contributed twenty years ago, prior to the date of marriage, would have a present value of $7,739. Two thousand dollars contributed five years ago, during the marriage, has a present value of just $2,805. The Majauskas time-based approach would treat each year’s contributions as having the same value when the assets are divided.
Despite Turner’s misgivings about applying the Majauskas formula to a defined contribution pension plan, the Jennings decision does recognize that it can be, and is, done in a minority of cases. In a purely mathematical sense, the Majauskas formula can be applied, but for the reasons cited above with regard to the amounts and timing of contributions to the retirement plan, it is very unlikely that such an approach will accurately classify the marital and separate property. An approach that traces the contributions and returns on the separate property element of a defined contribution plan will almost always produce a more reliable result.