Divorce: Economic Issues

As indicated above, an employer-sponsored pension is often an important asset that becomes part of the discussions that occur with regard to the disposition of marital property during a divorce. The federal Retirement Equity Act of 1984 provides for the issuance of a "qualified domestic relations order" that can be used by a court to split a pension benefit or account between divorcing spouses, effectively dividing the pension without the need to place a monetary value on it.

There are situations, however, where a division of the pension equally between both parties in a divorce may not be in their best interests. In some cases, for example, other assets within the marriage cannot be easily split (such as a home, trusts, or other real property). In these cases it may be best to determine the monetary value of a future pension benefit so that it may be offset against the value of other marital property.

In the case of "defined contribution" pension plans, the value of benefits accruing to a particular worker can be determined quite easily. Defined contribution plans establish separate accounts for each worker that are valued periodically—often daily.

The benefits of "defined benefit" pension plans cannot be valued so easily, and the benefits generally cannot be assigned or transferred to some other person. There are nearly forty-two million working men and women in about fifty-five thousand, private-sector defined benefit pension plans. The most distinguishing characteristic of these plans is that they promise to deliver a clearly specified (i.e., defined) benefit amount based on a formula that typically relates the worker's benefit to years of service and (somewhat less frequently) to the earnings level of the worker. Thus, the value of these pensions in the future depends on the evolving work history of each worker and any changes in the benefit promise made by the employer in future years. This means that in the case of divorce, it is not a straightforward exercise to place a lumpsum monetary value on defined benefit plan assets held by a worker at any moment in time.