A settlement agreement awarded a recipient spouse $175,000 from a defined contribution plan. The document was silent on gains and losses post-Date of Separation. By the time of division, their proper share had grown to $223,000.
The recipient spouse lost nearly $50,000, because market growth wasn’t included in the agreement.
This is not a hypothetical. This happened in 2021, and the client discovered the oversight only after retaining new counsel who calculated the foregone gains.
Retirement Plans Have Changed. Attorney Strategies Haven’t
Since the 1980s, 401(k)s and IRAs have largely replaced traditional pensions, tying retirement savings directly to the stock market. According to the Investment Company Institute (2024), defined contribution plans account for over 65% of the $43+ trillion in total U.S. retirement assets.
The challenge? Many attorneys continue using outdated and inappropriate Time Rule formula approaches for dividing these market-driven accounts.
The S&P 500 has historically delivered an average annual total return of approximately 10.50%, including dividends (YCharts, 2024). That’s real money—money your clients are counting on you to protect.
That’s why you should ask yourself (and answer) two critical questions before drafting settlement language.
(1) Does the retirement plan track gains/ losses?
Some plans automatically adjust for market fluctuations between the Date of Separation and the date of transfer. Others don’t.
Most defined contribution plans, including 401(k) plans, 403(b) plans, 457 plans, and Thrift Savings Plans (TSPs), adjust account balances to reflect investment gains and losses over time.
However, certain retirement plans, including IRAs, government-administered defined contribution plans, and TIAA-administered retirement accounts, do not track gains and losses between the valuation date and the date of transfer. Instead, these plans require that the division be based on the account balance as of the actual date of transfer, regardless of any changes in value that occur between the settlement and the distribution.
If the plan doesn’t track gains and losses automatically, a manual calculation is required, not only to determine the marital share’s gains and losses between the date of separation and the date of transfer but also to exclude any post-separation contributions and their associated growth, which remain the participant’s separate property. These calculations can be complex, especially when multiple years elapse between settlement and division.
(2) Is the settlement language explicit about gains and losses?
If your agreement is silent on post-Date of Separation gains and losses, most QDROs will also be silent—potentially costing your client thousands.
For plans that track gains/losses, your settlement language must explicitly state, “plus gains/losses until the date of transfer.”
For plans that don’t track gains/losses, you’ll need to provide a pre-calculated amount that already includes the growth (or decline).
Now let’s look at a couple disastrous scenarios that can occur when the settlement language is poorly drafted.
First, consider a settlement that grants the recipient spouse $50,000 from a $100,000 retirement account. The agreement is silent on gains.
Between settlement and transfer, the account grows to $120,000.
Without explicit language addressing gains, the recipient spouse still receives only $50,000—missing out on $10,000 in gains they should have received.
Second, consider the same setup, but now the account drops to $90,000 before transfer.
The recipient spouse still gets $50,000, but now the plan owner bears the entire $10,000 loss.
Without proper language, market fluctuations create unintended financial windfalls or burdens.
The TIAA Case Study: When a Plan Rejects Your Historical Valuation Date
Consider this actual case language: “Party One holds a TIAA 403(b) account that was established during the marriage. Party Two shall receive 50% of the account balance as of November 7, 2024 (Date of Separation), plus any gains and losses until the transfer.”
This language was rejected by TIAA, who will only accept assignments based on the date of transfer, not historical valuation dates.
Tracing Separate Property: The Forensic Challenge
Separate property claims require forensic analysis, especially when historical records are incomplete. Most jurisdictions recognize that separate property contributions remain separate if properly traced.
For instance, in a case involving multiple missing years of 401(k) statements, we reconstructed the non-marital portion using partial statements, W-2s, and conservative growth estimates based on market performance. This analysis identified approximately $165,000 in separate property that would have been lost without detailed tracing.
Another case involved a plan owner who had rolled over multiple IRAs/SEP IRAs, losing track of original statements. By backtracking from the last full statement and applying documented contribution limits from tax records, we preserved substantial separate property rights.
The Unseen Risk: Loans and Withdrawals Post-Date of Separation
Outstanding loans and post-Date of Separation withdrawals are major blind spots in retirement settlements:
- If a plan owner took a loan from the plan before the divorce, is that deducted from the marital balance or assigned to the plan owner?
- What if a plan owner continues making contributions after the Date of Separation? Does the award account for those, or is the recipient spouse receiving a cut of post-separation earnings?
Let’s say a plan owner borrowed $50,000 before the divorce. The marital portion was set at 50 percent—but was that 50 percent of the gross balance or net after the loan? If this isn’t specified, the recipient spouse could receive substantially less than intended.
QDRO Pitfalls to Avoid
The first big pitfall is using the Time Rule formula for defined contribution plans. The Time Rule approach (based on the duration of the marriage) is typically designed for defined benefit plans. Defined contribution plans are generally better divided based on account balances and specific contributions.
The second pitfall is inadequate plan identification. Generic references like “Party One’s Fidelity 401(k)” are insufficient. QDROs require specific plan names and identifying information.
The next pitfall is insufficiently addressing loans. Plan administrators need clear instructions on whether loans are included/excluded. Silence on loans can lead to disputes or rejection of the order.
Another pitfall is failing to specify investment allocation. Some plans keep the recipient spouse’s portion in the same investments. Others liquidate to cash unless specified otherwise.
The final big pitfall is ignoring tax implications. For instance, a $50,000 pre-tax transfer is not equivalent to $50,000 post-tax. The timing of distributions can significantly impact tax treatment.
Settlement Language Guidelines Based on Plan Requirements
For plans that track gains/losses (e.g., 401(k), TSP, 457(b)), use language such as:
The Alternate Payee (recipient spouse) shall receive fifty percent (50%) of the Participant’s (plan owner) vested account balance as of the date of separation [insert date], adjusted for investment gains or losses attributable to this amount between the date of separation and the date the benefits are segregated into a separate account in the alternate payee’s name.
For plans that do not track gains/losses (e.g., IRA, TIAA), use language such as: “The Alternate Payee is awarded a percentage or a lump sum of $_____ [representing the calculated amount by the post date of separation analysis] of the Participant’s IRA(s), as of the Date of Transfer.”
Also, address loans explicitly: “This amount shall be calculated on the gross account balance, including any outstanding loan balance.”
In addition, consider a variance or true-up clause for flat dollar amounts: “Party Two to receive $200,000 from Party One’s $400,000 account as of December 31, 2023, with a 10 percent variance allowed, ensuring Party Two receives $200,000 unless the account balance drops below $360,000.”
Client Conversations Worth Having
Be sure to tell clients to NOT move money until the division is complete—not just until settlement is signed, but until the transfer is fully processed. A client who rolled over accounts before division created a forensic nightmare requiring years of transaction tracing.
Furthermore, address unequal growth in equalization. Market fluctuations can significantly impact equalization calculations. If one party invested aggressively post-Date of Separation while another played it safe, their “equal” division may no longer feel fair.
In the end, don’t let your clients lose money they should have kept. Ignoring gains and losses isn’t just a technical issue—it’s a serious financial risk for your clients and a potential liability risk for you.
Your job isn’t just to divide accounts. It’s to ensure that what your clients receive is what they actually expected—without surprises down the road.
The next time you draft a settlement, ask the right questions, clarify the language, and make sure the math works. Your clients will thank you.
That $50,000 mistake? It could have been prevented with a single sentence.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. Readers should consult with a qualified attorney for advice regarding their specific situation. The author and TOVA QDRO & Retirement Valuators disclaim any liability arising from the use of this information.