As if dividing one's financial life from married to single status wasn't enough, there are sometimes hidden costs one should be aware of. One part of the divorce process is asset division. If a couple has been married for many years, they have likely accumulated assets that may be on the table during discussions of asset division. One asset in particular is usually important to both parties. That asset is a couple's 401(k), also known as a retirement account.
Many understand that one benefit of a 401(k) is that money invested years in advance is worth considerably more later on due to compounding interest. A person's place of employment may even match a certain percentage of 401(k) contributions, further compounding the value of the retirement account. Oftentimes, a 401(k) is divided between the divorcing spouses. Did you know that something called a QDRO, or a qualified domestic relations order, is a fee that can be assessed when dividing the account?
Whether or not a QDRO is imposed upon the division of a 401(k) during the divorce process depends upon a few things. Who manages the account matters, like an employer or a third-party. Third-parties tend to assess those kinds of fees; if the account is managed by the employer, sometimes the fees are built into the cost of the account company-wide. The QDRO fees usually start around $300 and can jump up to $1200 or more depending on the account value and other factors.
Now that you understand what a QDRO is, it is important to understand whether or not this type of fee could be assessed on your 401(k) during asset division. The fee could be easily split between the parties if that was the fair and equitable way to account for it. However, since a fee can be assessed by a third-party after-the-fact, it often needs to be written into the divorce-decree before the fee is actually assessed. That way one party doesn't get stuck with a fee for a service that both parties utilized.
Source: bloomberg.com, "The Divorce Penalty: This 401(k) Fee Can Add Insult to Injury," Suzanne Woolley, January 23, 2017