How to avoid common pitfalls when drafting Defined Contribution Language



A Defined Contribution Plan (DC) is a type of retirement plan in which the employer, employee, or both make predetermined contributions on a regular basis.  Individual accounts are set up for participants and benefits are based on the amounts credited to these individual accounts (through employee contributions and, if applicable, employer contributions and matching) plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate based on investment earnings.  Common types of defined contribution plans are 401(k) plans, 403(b) plans, profit sharing plans, employee stock ownership plans (ESOP), money purchase, Keogh plans and savings plans.



It is important to include language in the parties Marital Settlement Agreement that clearly identifies each individual account to be divided by QDRO by its legal plan name.  This will protect your client by avoiding possible confusion and misinterpretation of the award in the future.

A 3rd party administrator is often hired by the Plan Administrator to handle the administration of the account.  Both small and large companies will often have an in-house Plan Administrator who is ultimately responsible for qualifying the domestic relations order.  The Plan Administrator will often work hand in hand with a 3rd party administrator during the qualification process.  Examples of 3rd party administrators are VOYA, VANGUARD, FIDELITY, T. ROWE PRICE, or the name of the financial institution who holds the account.

The legal name of the plan is different than the 3rd party administrator and often includes the name of the company that the participant works for.  The legal plan name is the actual name of the account as filed under ERISA and is a unique identifier of that plan.

The plan may or may not be administered by a 3rd party administrator.  If the plan has an agreement to be administered by a 3rd party administrator that agreement can change over time.  If in the marital settlement agreement, you refer only to the 3rd party administrator and that plan later contracts with a different 3rd party administrator, it can be difficult to identify the actual plan that was to be divided at a later date.

It is also possible that a client could hold more than one plan under a specific 3rd party administrator.  A client may have an ABC Corp 401(k) and a 123 Corp 401(k) from different employers but both accounts have Vanguard as their 3rd party administrator.  Naming the plan to be divided by the legal plan name will avoid confusion when trying to draft the QDRO.



Gains and losses can only be awarded on a Defined Contribution Plan.  By its nature the account balance can change daily as the investments in the account incur gains and losses.  Established in precedent by Taylor v. Taylor, 258 Wis. 2d 290, 653 N.W.2d 524 (2002), gains and losses are assumed awarded on percentage awards and not awarded on dollar amount awards unless specifically stated otherwise in the marital settlement agreement.  Always including specific gains and loss language in the award language is a good practice and will clarify the award and avoid any room for misinterpretation of the party’s intent in the future.



When determining the amount to be divided, it is important to consider the impact of any outstanding loan balance(s) in the Participant’s account. An outstanding loan may be considered to be an asset in the Participant’s account, but the obligation to repay the loan stays with the Participant and cannot be transferred to the Alternate Payee. The Order should clearly indicate whether the value of the Participant’s outstanding loan (as of the Valuation Date) will be included or excluded as an asset in the Participant’s account balance to be divided.



Make your clients aware that failure to complete the process to secure a QDRO may result in total loss of benefits awarded to the Alternate Payee under the terms of the Marital Settlement Agreement.  Include language in the Marital Settlement Agreement that defines a time period for starting the QDRO process, who will be responsible for starting the process, and who will be responsible for paying for any costs associated with the QDRO.


If you have questions regarding how to limit your liability when drafting Defined Contribution language or for a free template, please contact our office.