Many divorce lawyers refer to it as a ‘hidden’ fee that adds insult to injury. As 401(k) plan participants amass wealth in defined-contribution plans, more and more baby boomers filing for divorce are learning of a little-understood abbreviation that causes frustration in what is already an exasperating divorce process.
The QDRO fee is for processing a qualified domestic relations order, which transfers assets in a defined-contribution account. During a divorce or legal separation, a QDRO splits and changes a retirement plan’s ownership to give one spouse a share of the pension or asset plan.
Here are 3 things you should know about QDROs and the fees that come with them.
A QDRO Fee Can Be Expensive
If you’re lucky, your employer might have opted to make the QDRO fee part of the plan’s costs, which are divided among account members.
However, if a third-party administrator like Vanguard or Fidelity Investments handles the 401(k) plan’s records and administrative details, a plan participant can be charged a QDRO fee as high as $1,200 and beyond. And that doesn’t include the cost of paying the lawyer to prepare any paperwork for the process, not to mention the cost of filing for the divorce itself.
As consumer rights attorney Carl Engstrom of Nichols Kaster notes, record keepers typically “enhance profit margins, while remaining competitive on record-keeping charges” by charging “bloated transaction fees to participants.”
And it’s a problem that’s becoming increasingly common in recent 401(k) litigation cases.
The QDRO Process Requires the Guidance of a Skilled Attorney
While class-action lawyers can quickly spot a potential case involving exorbitant transaction fees, divorce lawyers often have a harder time going through the dense and rigid 401(k) language used by financial services companies like Fidelity. In short, many lawyers specializing in divorce are ill-equipped to understand the ins and outs of QDROs and tax-advantaged retirement benefits.
And when an administrator receives a QDRO with the wrong language, it’s sent right back to the lawyers, which means their clients have to pay for it once more. And when clients are hit with a thousand dollar fee out of nowhere that the divorce lawyer didn’t see coming, it naturally makes the lawyer look bad.
It’s a Lucrative Business for Third-Party Administrators
According to Bill Burns, a QDRO and pension valuation expert with Lexington Pension Consultants, it’s the large third-party administrators that charge excessive fees for QDROs.
Burns adds that while many other investment plan fees and expenses have declined significantly over the years after multiple consumer complaints and lawsuits, QDRO fees at at certain places haven’t changed for more than 15 years. In fact, they seem to be on an uptick.
Until retirement plan members can come together to act on the issue, many Americans have no choice but to add QDRO fees to a growing list of concerns surrounding a divorce or legal separation. If you or a loved one needs assistance in this matter, talk to family law attorney Daniella Lyttle of the Lyttle Law Firm today. Schedule a consultation by calling our offices at 512.215.5225.