Episode 28 – Divorce and your pension
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. Now, we know that sometimes money can be a difficult subject to talk about. And that’s one of the reasons why we wanted to make this podcast to help people have more conversations about their money. But one of the toughest conversations can be around the topic of divorce. So today we wanted to chat about what that experience can kind of look like as a public employee and what happens to your pension.
We have Kumano here who works for DRS and works with customers who are experiencing a divorce or separation. Welcome Kumano.
Kumano
Hi. Glad to be here.
Jenny
Okay, great.
Seth
So, Kumano, maybe just a level set from the start. Could you explain to us again a little bit about what the difference between a divorce and a separation is for customers who might be thinking or have gone through this process? To give a little bit more background?
Kumano
Yeah, I think it’s important to know about those two in regard to what they mean and what they could mean in the process with us at DRS. So first, a divorce is the dissolution, the legal dissolution which is approved by courts, that the marriage is dissolved, which meaning all legal ties under that marriage are dissolved and there’s no longer a connection between either party in regard to any benefits under a marriage.
So that is divorce, it is a legal dissolution of the actual marriage. But a legal separation is much different. It is the retention of the marriage. There is not a dissolution of the marriage, but the courts have recognized that there is a legal separation of the parties and there is also property that is going to be separated as well.
So, under legal separation, they have retained the marriage and all the rights under that marriage and the benefits. But in regard to property, they have legally separated and have identified that property within that legal separation agreement. And so those are really the two types of legal orders that we may see regarding, quote unquote, divorce or separation.
Seth
I think that’s really helpful. I think we’ll probably throughout this conversation, use those two terms interchangeably and not be as precise as maybe we should be. So, I just want to make sure we have that clarification. Kumano, I think it’d be helpful if you could just tell us a little bit about the basic ways a pension benefit might be split between spouses.
Kumano
Sure.
Seth
So if you could just give us a little background there.
Kumano
Yeah. So, there’s a….you use the word split, which is a type of legal a division of benefits that we offer. And I’ll sort of use that as sort of a general term in regard to the types of we’ll call it splits that can happen on pension property. And so, over the history of our pension plan, there have been sort of two generations of types of legal orders that we’ve applied to accounts that do separate out property.
But as you’ll see in my discussion on the second one, it brings in the word split more. So originally in the nineties, the legislature had created laws around applying legal orders that would provide an interest in the benefit for the legal order payee from the member’s account, and that interest on that benefit would pay that legal order payee for that member’s life.
So, as long as the member was alive, the legal order payee would get a percentage of that benefit and they would decide on whatever that percentage is up to 75%. And so that was in place for the better part of ten years. And then the legislature had provided a different opportunity for members in regard to divorce or legal separation, which is called a split legal order.
And it is quite different from the interest because it gives a lot more independence to both parties in regard to how they manage their property from that pension. For example, under a split order, let’s say you have a member who’s got a pension earned in the marital community period of $1,000, and then they also have a balance of a $50,000 because a pension account will always have a balance along with a benefit.
Well, let’s say they split that and they give the split 50/50. So that means that the legal order to payee would get 50% of that thousand dollar benefit or $500, and then 50% of that balance of $50,000, which is 25 and that piece would move over the $500 and the 25,000 into a separate account under that pension plan for that legal order payee the nonmember and they would be able to collect that benefit at the full retirement age.
And so, you can see the difference. The interest order allows a payment to the legal order payee, but only for the lifetime of the member. And then it stops. But with a split, the property is assigned to the legal order payee as their own, and they can retire independently of the member and collect it on their own for their lifetime.
So, you can see that that new opportunity the legislator provided in ‘04 provided a lot more independence and self control of their own finances. By having splits, they were able to move that money if they wished. They could start it when they wish and they could invest it if they wanted to in a different way, if they’re in Plan 3.
So, a lot more independence. That’s sort of the history and the two methods in which we apply divorce or legal separation orders to member accounts.
Jenny
And what sort of formula might be used when you’re looking at splitting up these accounts?
Kumano
Yeah, that’s actually sort of a positive note for those who may, you know, not want to get into formulas, which is there really isn’t a magic formula. What really has to happen is, is that the parties have to decide on what part of that property is, part of the separation or divorce. So, for example, what we usually do is we ask somebody when they call about inquiring about divorce and its impact, we always ask for date of marriage and date of separation and what that provides us is a demarcation point for the pension to know what property we’re going to be looking at for value.
And so once we know what property timeline we’re looking at, let’s say, for example, 2000 – 2010, then we would look at the benefit earned in that period. We look at the investments or account balance for that period, and then that would be the negotiating property. Now, for the formula, it’s the same as a member would have when they calculate their pension, it’s 2% times service credit years, that kind of thing.
So, the formula is still the same for getting to the pension, but really we’re assigning a percentage of that member’s pension to the legal order payee, the nonmember. So, it’s not really a formula, it’s a percentage. And like I referred to in my example, 50% of a benefit, that benefit would be moved right over into their own account.
So, we didn’t arrive at a formula to get what they were awarded. We did that to find out what the benefit was for the member in that marital community period, which is the standard pension formula, 2% times service credit years times your average salary. So, we use that for the member and the benefit for that period of time. But the divorce will tell us what percentage of that benefit we will give to the legal order payee or the nonmember.
Seth
I think that’s a really good point. We don’t think about that when we think about our own pension benefits very often. If I work one more year, I might add $200 on to my pension benefit that I’m going to receive eventually when I retire. So, I’ve added that value on to my pension. And so if you’re talking about splitting that with another person, that property that I own, it’s my contractual right with the state.
But then if I’m getting divorced, my spouse might be able to take half of that benefit. We might choose —I shouldn’t say “take” — we could choose to split that benefit between us. I would get $100 and she would get $100. So, I think it’s an interesting way to think about even if you’re not married or thinking about divorce or separation, it’s an interesting way to think about your pension benefit every year. Here’s how much I’m adding on to that overall value.
Kumano
Yeah, yeah. The 2% is a really good standard to utilize when engaging in trying to figure out what the value of your pension is. So yeah, 2% times service credit, years, times average salary, that’s pretty straightforward. And then it’s even simpler in regard to how to break off that piece because it’s going to be a percentage. Now the important part and I notated this early on the limit per law for awarding any divorce property from our pensions is 75%.
Now there is an exception for Plan 3s, but we can get into that later if you want to. But essentially 75% is the cap. So, you could negotiate an award any more than that of your pension.
Seth
I think that’s also a good point of clarification. This all takes place in a broader negotiation or experience. There might be other things that you’re valuing, whether that’s a home or other retirement accounts or things like that. And so that’s part of the conversation. I think when you’re kind of going down this road. Kumano, I know one of the questions we wanted to make sure we asked you: what are the sort of common mistakes that people make when they’re going through this process?
One thing I also wanted to make sure we did, Jenny, before we get to Kumano’s answer here, is give our legal disclaimer that we always give at the end of the podcast, but we want to make sure we give now that we’re not providing legal advice to folks. DRS employees can’t provide legal advice, but we want to provide people information.
And that’s a lot of what Kumano’s team is doing is they’re providing information to people who are going through this process and then they can decide how they want to take action on that.
Jenny
Yeah, that’s a great point. So, if someone is going through a divorce or separation, obviously you’re speaking with your lawyers and your legal team and all of those things, but we do want to encourage people to contact DRS, see what their options are.
Seth
Yeah, just learn more about their pension and what options they have as far as Kumano described splitting those accounts. So, Kumano, what sort of mistakes or confusion or regrets do people have when they’re talking to your team?
Kumano
Yeah. And I’ll sort of follow up on what you were saying in regard to, you know, the disclaimer. That’s an important piece because a lot of our activity over the phone, a lot of customers or even non members who call us about divorces, they have a perception that we are lawyers and we are not. And so that I would say is one of the misperceptions is that we provide legal services in regard to advice and we don’t.
What we do provide and provide in abundance, is information and guidance in regard to how the process can be navigated, what is required in the process, and then any reviewing of artifacts that are created in the legal process that we can provide compliance reviews on. So we do compliance, we provide information, and then we also council members on the phone. But in regard to the choices that would be up to them or their counsel if they hired a counsel. Another misconception in regard to splits, I would say, or just an award of property.
There is a misconception that once an award of pension property is done by DRS, that the legal order payee, which would be the nonmember and that’s how all categorized them, can start their pension right away and so that is a fairly common misperception, is that once the courts provide the property award and we apply it to the account, then we can start paying that person right away, which is not the case.
It certainly would be the case if that person was retired already. But in most cases, for example, under an interest order, that person is only able to collect when the member starts retirement. So you can see in the interest order that you’re still connected to that member. You’re still reliant on that member to start collecting your award. Unlike a split, if you meet certain vesting criteria for that pension that you got property from, you can retire right away or as soon as 65.
So, there’s a little bit more immediacy in that choice, but that is a misperception that they can start it right away. And then for mistakes, I think the most common one that I see is I see orders come in, divorce orders, and they do not have any of the required language that pension law requires for applying a legal order for dividing a property.
So, what happens typically is they didn’t call us. And so that’s unfortunate because a lot of times we can provide a lot of information to them that may have prevented either hiring a lawyer or spending more time in that space than they needed to.
Jenny
So specifically, you’re saying that, yeah…So the first thing they need to do is call because there is very specific legal terms that they need to be able to use on their paperwork.
Kumano
It’s required. Yeah, there’s mandatory language that is required to be in those orders to carry out the administration of that award. And that is the biggest mistake that is made, is we get the divorce orders after the fact when the judge has signed it, nothing’s in there. And then they have to start the whole process over with us again.
Jenny
Gotcha.
Seth
And Kumano, my sense is that your team provides examples for folks, or example language or can point people to that standard language to make it easier for folks. Is that right?
Kumano
Yeah, the language has always been out there, but I think you’re alluding to probably something that we’ve improved or made it more accessible to customers in regard to the language. In the past, we required members or their lawyers to put this language that’s in Washington administrative code into the legal order, and we required them to put that in there and we required them to send it to us for review.
But we do have what we call a legal template now, which has…. we have templates for all the types of orders that would be affected for DRS and we provide those with the account information any time someone calls us about a divorce. And I think what this has done is provided the customer more accessibility to doing divorce themselves, they actually can create a legal order without a lawyer if they wanted to.
It also provides a more compliant example to the member or the lawyer. So, when they send us a draft, it’s probably going to be compliant almost 100% because everything’s in there. So, I think we do currently have a tool that the member could use to not only save themselves time and money, but also to empower them to take the process onto themselves and do it with the same result as a lawyer.
Jenny
Yeah, that’s really fantastic. I mean, all the more reason to call in and ask for that form.
Kumano
Well, yeah, I think what we wanted to do is, you know, we, we provide great information, but we require people to reach out to us and when they do, it’s usually the last time we’ll see them for a while until they’ve negotiated their property. And so, we wanted to provide them a tool in which they could compress that time much quicker and really save them a lot of money.
Jenny
You touched on this a little bit earlier, but does the process look any different if a member is currently working and goes through a divorce versus when they’re retired and going through a divorce?
Kumano
Yeah, those are completely different in the sense that a lot of times a member will choose their spouse at the time they retired — that they may be divorcing later — as a survivor. And so, that will definitely complicate well, I shouldn’t say complicate. It’ll make choices a little bit more clearer because when you’re retired and you pick a survivor, then usually what I see in divorces is, is that they want to assign a part of the pension property, but they don’t want to assign a lifetime survivor benefit also.
So, what they want to do is remove the survivor and just award the property. And that takes, only a split can do that. So, you’re right, when you’re retired or when you’re just an active or even an inactive member, the legal choices could be different based on that status. And that’s why it’s really important to us to understand the differences according to your situation, whether you’re retired with the survivor or you’re just an inactive employee with an account balance.
Seth
Kumano, is there anything else you want to make sure we share with our customers, our membership around divorces or separations that people might not think to ask or kind of wish they would have known after the fact?
Kumano
Well, I think one of the most important things just right out of the gate is to understand that a divorce or legal separation does not necessarily mean that your pension is affected. I think that’s a huge piece because a lot of people don’t understand the choices they may have. And I’ll give you an example. So let’s say, for example, we have a member who has a PERS account, they’re vested, they have a pension and they also have Deferred Comp.
So, what I do see sometimes is that parties will negotiate a part of property, but it won’t include one of the pensions. For example. Let’s just say that this person negotiated with their spouse that the PERS pension they have would not be part of the divorce, but they would provide a part of the Deferred Comp as a one time payment to the ex-spouse.
And so, I think the most important thing for members to understand is that a divorce and separation, is not a finality to your property. It’s merely a start of a discussion about what it’s going to look like after the dissolution or the legal separation. And that could be no impact. That could be a partial impact like the example I just gave, or that could be, you know, a negotiated impact.
If you both had pensions, you get a part of each others’. So, that to me is one of the most important things. Don’t always think that it’s going to affect you. And that can always be resolved by calling us, posing your situation, and then we can provide you the options. So I think that’s important for members to know.
Seth
I just think that’s a really good point. It’s something that Jenny and I talk about oftentimes on the podcast is just that Deferred Compensation gives you more options and choices in general. In a lot of ways that also is true with divorces. It’s another thing you have to make a decision on, but it’s something that you could maybe have some additional flexibility on as well.
And Kumano, as you were talking about that example. I think we’ve certainly seen cases where both parties are members of retirement plans and in some ways it might make sense for, as you were describing, for both of them to just leave their own property with themselves. And in other cases, it might make more sense to completely split that property. And I think it’s really up to the individuals to decide what makes the most sense for them.
Kumano
Yeah, I think this is a really good conversation because it’s opening up that space that most people fear and feel that it’s going to be a pretty bad experience. It really relates to what the choices can be, and I think it really highlights the need to reach out to DRS, to start having that conversation. I think the outcome can be managed with a lot of different choices and it doesn’t always have to be sort of a fait accompli that it’s going to go one way.
And I think that’s the big message I want to give everybody in this podcast, is that there are so many different choices and so many different options when it comes to divorce and legal separation within our state pension plan that just reaching out to us, you know, we may be able to provide you some choices or give you some insight into options in this process that may alleviate some of that that concern.
Seth
I really appreciate that and thank you for coming on the podcast. I also want to highlight that you’re part of a bigger team that deals with this. It’s just not Kumano at his desk, dealing with every divorce.
Kumano
We’ve got a team of strong legal analysts who are definitely prepared to help you on all of this information and definitely ready and willing to engage with you in this process.
Seth
All right. Thanks, Kumano.
Jenny
Thank you.
Kumano
All right, guys, take care.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
