The Divorce Penalty: This 401(k) Fee Can Add Insult to Injury
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.”
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