As a Texas divorce and child custody lawyer, I often come across clients who are concerned about the division of their retirement accounts during the divorce process. It is important to understand the difference between defined benefit plans and defined contribution plans, as they are treated differently under the law and can have a significant impact on your financial future.
Defined Benefit Plans
Defined benefit plans, also known as pension plans, provide a guaranteed monthly income to the employee upon retirement. These plans are funded by the employer and the benefit is based on a formula that takes into account the employee’s salary, years of service, and other factors. Examples of defined benefit plans include traditional defined benefit pension plans, cash balance plans, and target benefit plans. Teacher retirement plans and federal employee retirement plans, such as the Federal Employees Retirement System (FERS), are often defined benefit plans.
Defined Contribution Plans
Defined contribution plans, on the other hand, are retirement accounts where the employee and/or employer contribute a specific amount of money on a regular basis. The benefit the employee receives upon retirement is based on the contributions made to the plan and the investment returns on those contributions. Examples of defined contribution plans include 401(k) plans, 403(b) plans, and profit-sharing plans. The Thrift Savings Plan (TSP) offered as part of the Federal Employees Retirement System (FERS) is a defined contribution plan.
Pros and Cons of Defined Benefit and Defined Contribution Plans
Both types of plans have their pros and cons, and it is important to understand the differences when considering how to divide these assets during a divorce. Defined benefit plans are generally more stable and predictable, but they may not provide as much flexibility or control as defined contribution plans. Defined contribution plans, on the other hand, offer more control and flexibility but also come with more risk, as the benefit is dependent on the performance of the investments.
Dividing Retirement Assets During a Divorce
In a divorce, the court will consider the type of retirement plan when dividing the assets. Defined benefit plans are typically treated as a marital asset and are subject to division, while defined contribution plans may be considered separate property depending on the specific circumstances. It is important to work with a knowledgeable divorce lawyer to ensure that your retirement assets are properly protected and divided in a fair and equitable manner.
If you are going through a divorce and have questions about the division of your retirement accounts, I encourage you to contact the qualified divorce lawyers at The Blacknall Firm for assistance.
