The divorce rate among seniors doubled between 1990 and 2014. Now, nearly 25 percent of people entering divorce are over 50, and 10 percent are over 64. Yet older couples face special financial risks when their marriages end.
Most people are aware that splitting retirement assets can be a particularly complicated facet of divorce. When stocks, bonds and similar holdings are involved, it can be difficult to ascertain the true value of one's assets. Likewise, it is rarely clear how pensions and retirement accounts can be fairly allocated.
A recent article in Bloomberg, meanwhile, hones in a specific issue: The unexpected fees associated with dividing a 401(k).
"Bloated transaction fees"
Retirement accounts, like all assets, are subject to division during divorce proceedings. But because liquidating a 401(k) could create a sudden tax burden, divorce lawyers typically advise their clients to obtain a qualified domestic relations order (QDRO) to safeguard against potential losses. Simply put, a QDRO enables a portion of a retirement account to pass from one spouse to the other without requiring liquidation. As such, it is an effective means to avoid taxes.
However, as detailed in the Bloomberg article, a cottage industry has emerged, wherein financial firms such as Fidelity Investments and Vanguard Group have begun to charge exorbitant fees to administer QDROs. Costs can quickly "stretch to $1,200 and beyond." Firms justify the practice by claiming QDROs are complex to handle.
Yet Bloomberg notes that the administrative fees may be nothing more than a means for financial firms to boost profit margins. One legal expert stated that QDROS are "a cash-printing machine for plan administrators" because firms can charge whatever they want with minimal recourse. If clients refuse to pay, then their QDRO will simply not be granted.
What can be done?
In some cases, a divorce attorney is able to work with financial firms and negotiate lower fees. Likewise, some firms have model QDRO forms that, if followed diligently, save clients a few hundred dollars.
But unless a class-action lawsuit or some other instrument leads to normalized fees industry-wide, the best means divorcing couples have to protect themselves is to be aware of the potential costs of QDRO administration, and work with a lawyer who knows how to minimize them.