A pension plan may be the most substantial asset of many Tennessee marriages when couples forego other methods of investing or saving in favor of participating in an employer-sponsored plan. Typically, these types of plans, such as a 401(k) are considered an “extra” benefit of working for an employer who invests in its employees in this manner, allowing them to earn full vestment, or ownership, after a period of time, which is typically five years. When a couple faces divorce, diving up this asset can sometimes be difficult, depending on several contributing factors, including the type of plan and its components. In high-asset marriages, a plan may include employee stock options, profit sharing and additional investment opportunities.
Valuing a pension plan for divorce is something in which some financial firms specialize. Voit Econometrics Group explains that pensions typically belong to one or the other of two types of very broad categories: plans that are described as either defined contribution or defined benefit plans. A contribution plan describes one in which current contributions have a future value that is not certain. A benefit plan pays monthly amounts to the holder upon retirement, a number that is typically based on the employee’s salary at the time of retirement and/or his or her length of employment. A third type of plan includes these two types in various combinations.
The value of a defined contribution plan merely is its account value and can, therefore, be easily divided. A defined benefit plan is typically fully funded by the employer and promises a set monthly payment for a certain length of time. To arrive at its value, a financial analyst takes the account’s present value into the future, accounting for the holder’s likely income at retirement age, then brings that amount back to the present. Specific discounts may also be applied, such as the mortality discount, which addresses the increased value to the spouse if the pension holder dies before receiving the pension. Cost-of-living adjustments, typically seen with government pensions, is another factor that must figure into the process.
For a couple facing divorce, valuing a pension and all the factors that contribute to its present/future value can make their heads spin. So it is not surprising that a divorce attorney may need the help of a financial specialist to help evaluate assets.