There are two main reasons not to use QDRO models: Technical limitations and QDROs that don’t comply with the intent of the parties.
While some companies do self-administer their qualified retirement plans, an ever-increasing number have chosen to turn over administration to an outside third-party. In fact, quite often, the task of reviewing and accepting or rejecting Qualified Domestic Relations Orders (QDROs) falls within the exclusive domain of the outside administrator. To save on internal costs associated with training a large staff in QDRO administration, many large third-party administrators are encouraging the use of model QDRO forms and online generation of QDROs.
It’s clear why administrators want clients to use a cookie-cutter form or online generation: it saves them tremendous funds in QDRO training.
What’s in it for the client, though?
The federal government says when it comes to defined contribution plans, administrators can pass along a reasonable portion of administrative fees (i.e. training and staff costs) to the parties. Our idea of what is reasonable could be quite different than the plan administrator, but that’s a topic for another blog!
Administrators have found that by charging a hefty QDRO review fee and then offering a discount to use their model or online generation tools, clients are tempted to bypass hiring an expert and take the “cookie-cutter QDRO” route.
Aside from saving an upfront fee, this is generally not in anyone’s best interest, whether they are the plan participant or the alternate payee. For example, on a certain nameless “F” website, lawyers or clients can create a QDRO by entering the basic information, answering a series of questions and with a click, a QDRO is generated.
What are the technical limitations?
Plan administrator “F”’s web-generated QDROs include a clause that holds “F” harmless for any errors or mistakes they made. Uh oh. What if the client doesn’t understand the choices offered and picked the wrong one? It is not “F’s” fault. They also do not include signature lines for the parties, which disqualifies them from being entered by most family law courts. Any editing or deviation from the generated form, however, disqualifies the client from receiving the discounted administration fee.
Other administrators will send out a model QDRO, rather than relying on a website, to be completed by filling in the blanks.
Why can’t I just use a fill-in-the-blank QDRO model instead of hiring an expert?
There are a few reasons we do not recommend using QDRO models or online-generation websites. The biggest reason is because most of the forms don’t present all the choices available for all the terms negotiated – or all of the choices that clients are entitled to receive based on what the divorce judgment says.
For example, in order to streamline and simplify things, these forms might only offer the ability to assign a percentage or a dollar amount of a 401(k) to the non-employee spouse. However, what if, as in many cases, that person is awarded 50% of the account plus an additional sum to offset other assets, cover legal fees, etc.? Similarly, what if on a defined benefit plan, the form doesn’t offer the specific survivor option choice that the parties agreed to (and the plan actually allows) or the assignment of benefits using a coverture fraction? What if the alternate payee ends up with an unintended windfall that disinherits the participant’s second spouse? What if the parties meant to exclude loan balances in the assigned amount, but because the form is so confusing, they end up accidentally including them?
In fact, some of the model QDROs we’ve seen actually benefit the non-employee spouse in ways that are significantly detrimental to the participant. Remember, the model benefits the plan administrator; not necessarily the participant or the alternate payee.
In the long run, clients save time and money using an expert who knows the pitfalls to look for, and how to avoid falling into them. Work with an expert from the start, or you may have to start over!