Ever hear of a QDRO fee on a 401(k) plan action? If not, financial advisors can expect to be sideswiped to the tune of $1,200 on a divorced client’s 401k plan, and really for no good reason – other than to make plan administrators much more profitable.
Here’s the deal, along with a brief primer on QDROs.
A qualified domestic relations order, or QDRO, is a “special court order that grants a person a right to a portion of the retirement benefits his or her former spouse has earned through participation in an employer-sponsored retirement plan,” according to Pensionrights.org. “QDROs are typically prepared during divorce proceedings, though they can be filed years after divorce.”
In a QDRO scenario, the person who earned the benefit is called the “participant” and the person who is designated to receive a share of that benefit is called the “alternate payee.” QDROs can award benefits to the alternate payee while the participant is alive, as well as survivor benefits if the participant dies, according to Pensionrights.org.
That’s a big deal when a 401(k) plan with significant assets is on the line in a divorce. Essentially, the DQRO provision acts as a fee that plan participants must shell out to spouses and former spouses as part of a divorce decree.
Fees vary, and they increase when a third-party investment firm manages the back-off responsibilities of a company’s 401(k) plan. In that scenario, fees are not included in the plan’s costs, and are charged separately directly to the plan participant. Fees of $1,200 or higher are not uncommon, and that doesn’t include attorney fees.
“It really depends on who the 401(k) plan is working with. While some financial
institutions, for example Fidelity Investments and Vanguard, charge large
processing fees, many financial institutions charge minimal fees to process
these QDROs,” said Paula Pitrak, a lawyer at Gardiner Koch Weisberg & Wrona in Chicago. “But in any event, there is no way around these processing fees.”
The link between a defined contribution plan, like a 401k, and a failed marriage, is an important one for financial advisors to know, noted Pitrak. “Retirement plans, such as 401(k), profit-sharing, stock bonus, and pension plans, cannot be assigned or alienated by participants, but QDROs provide an exception for child support, alimony/maintenance payments, or marital property rights to a spouse, former spouse, child, or other dependents of participants.”
The fees are a “necessary evil,” she added, needed to “properly divide retirement assets, to properly assign the taxation of the benefits, and to avoid paying an early withdrawal penalty from a 401(k) plan, which is incurred unless a QDRO is entered.”
What money managers can do for their clients who own a 401(k) and are divorcing, is to act as fiduciaries and negotiate lower fees from the third-party providers, like a Fidelity, T Rowe Price, or Prudential Retirement.
“Many employers will not charge a fee for splitting 401(k) plans, however, third-party providers handling the plan charge anywhere from $300 to over $1,200, said Aviva Pinto, director at Bronfman E.L. Rothschild in New York City. “The majority of the costs will be to the attorney drafting the QDRO, but it does add insult to injury to get a bill of $1,200 on top of the attorney fees from a Fidelity, Schwab, or a Vanguard.”
Know When The Fees Apply
Financial advisors should also know when QDRO fees apply and when they don’t.
“QDRO review fees do not apply to every account. IRAs and government plans do not charge review fees,” noted Jessica Markham, a divorce lawyer at Markham Law Firm in Bethesda, Md. “Only some employer-sponsored plan charge review fees.”
The best way to avoid these fees is to know about them in advance, Markham explained.
“Often, the divorcing couple is equalizing many plans and distribution can be taken from a plan that does not charge such fees,” she said. “Alternatively, some plans charge lesser or no fees if you use their model QDRO. For example, some Fidelity-managed, employee-sponsored plans charge $300 to use their online automated system in, and up to $1200 if you deviate from their system.”
Most attorneys that are preparing divorce agreement and QDROs don’t find out about these charges in advance which leads to problems later, when the financial advisor figures out his or her client is taking a potential $1,200 hit.
Markham has one way to deal with a high QDRO fee: “You can negotiate which spouse pays the fee.”
Good luck with that, money managers might say. But their job is to keep clients from getting slammed by a fee that’s one of the best-kept secrets on Wall Street, and in divorce litigation circles. That’s not where most clients want to be.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at email@example.com.
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