Getting a record keeper to fill out a legal document needed to divide a retirement account could cost more than $1,200.
A profit center. A silent fee. One more kick in the pants.
Those are a few of the ways divorce lawyers describe the fee that many 401(k) plan participants have to pay when they need to divide a retirement account in a divorce. As more wealth accumulates in defined-contribution plans and divorcing baby boomers move to split it up, more retirement savers are getting to know a little abbreviation that packs a big punch in frustration and exasperation.
The fee is for processing a qualified domestic relations order to transfer assets in a defined-contribution account. Some employers don’t charge separately for the QDRO — the fee may be built into the plan’s costs and, ultimately, spread across all your colleagues.
But when a third party such as Fidelity Investments or Vanguard Group handles the administrative and record-keeping details of a 401(k) plan, the QDRO fee charged to participants can start around $300, jump quickly to about $700, and stretch to $1,200 and beyond. That’s on top of what you’re paying the lawyer who prepared the form for the plan to approve and process.
One way record keepers can “enhance profit margins, while remaining competitive on record-keeping charges, is to charge bloated transaction fees to participants,” said Carl Engstrom, an attorney with Nichols Kaster, which has filed excessive-fee lawsuits against plan sponsors, the companies offering the 401(k) to employees. “While QDRO processing fees may seem like an oddball or niche issue, this problem raises issues that echo many of the same themes that we keep hearing in recent 401(k) litigation.”
Plan sponsors can wind up in the legal cross hairs for allegedly breaching a fiduciary duty by not negotiating for lower fees. The litigation has focused mostly on investment fees and overall record-keeping costs, not on items like QDRO fees.
QDROs are “like a cash-printing machine for plan administrators,” said Emily McBurney, an Atlanta-based lawyer who has specialized in QDROs for 16 years. Plans can essentially charge whatever they want, she said, and “no one can go up against the big record keepers to say that the amount is not reasonable, so people are trapped.”
There are tangled agendas here. Class-action lawyers may smell a potential suit alleging excessive transaction fees. Divorce lawyers say the Fidelitys of the 401(k) world are overly rigid in the language and format they require. Third-party QDRO experts, the attorneys’ competitors at times, say many lawyers don’t know the ins and outs of the laws surrounding tax-advantaged retirement benefits and QDROs. And when a plan administrator gets a QDRO that doesn’t have the right language, it goes right back to the lawyers.
Guess who pays for their time.
A QDRO fee of $500 to $1,000 is reasonable, said Stephen McCaffrey, chairman of the legal and legislative committee for the Plan Sponsor Council of America. He cites the administrative complexities of QDROs, which fall under the Employee Retirement Income Security Act of 1974. In a 2015 survey by Aon Hewitt of 367 plan sponsors, the percentage saying participants were directly charged a QDRO transaction fee was 55% in 2015, up from 25% in 2009.
Mr. McCaffrey said divorce lawyers “rail against this because they don’t have a clue about what needs to be done and the time it takes to do it. I suspect it’s not a profit center for the big record keepers.”
Source: Bloomberg News