Opinion ID: 2575999
Heading Depth: 1
Heading Rank: 2

Heading: Determination of the Marital Portion of 401(k) Plans

Text: Both Gary and Jackie contributed to 401(k) plans through CSX before and during the marriage. At the time of trial the balance in Gary's account was $648,473 and the balance in Jackie's account was $302,548. Gary began contributing to his plan in February of 1982 and Jackie started her plan a month later. Early statements for Jackie's 401(k) plan were missing. The earliest documents available were issued one and one-half years into their marriage. Gary had written down information from the missing statements in order to calculate the growth of each investment over time. He testified that he returned the originals to Jackie's son, but Jackie claimed she could not find them. While the originals were missing at the time of trial, Gary's written record of them was available. The trial court found that Gary had a total of 256 months in his plan, Jackie had 254 months in hers, and that both parties had 125.5 months of marital participation. The court prorated the funds according to the resulting coverture fractions. Thus, 49% of Gary's plan and 49.4% of Jackie's were found to be marital property. Applying these percentages to the current balance of each plan, the court determined $317,751 of Gary's plan to be marital and $149,450 of Jackie's. Gary takes issue with the court's method. He notes that at the beginning of the marriage he had $212,886 in his 401(k) account. This was separate property, and the earnings on this amount during the marriage were also separate property. He contends that the court should have traced the earnings on the separate property in the account through the years of the marriage. When this is done, the separate funds and their earnings can be subtracted from the total amount in the account in order to yield the portion of the account that is marital property. The court recognized that applying this method would result in Gary's 401(k) having a marital portion worth $174,195, in contrast to the $317,751 allocated by the court when using a straight time proration. We agree with Gary that in a defined contribution plan, as distinct from a defined benefits plan, proration by funds is the accurate method for distinguishing marital from separate property. Calculating the marital portion of a 401(k) plan through the use of a coverture fraction assumes equal periodic contributions and an equal periodic rate of return. Neither assumption is likely to be accurate. Further, even if these assumptions were accurate, the time proration method would still yield distorted results because it ignores compounding. These are flaws that can result in errors of considerable magnitude. To use this case as an example, the time proration method overstates the marital portion of Gary's account by $143,556. The leading text on property divisions recognizes that the appropriate method for the valuation of the marital portion of non-defined benefit plans is the proration by funds method: Proration by funds is always the preferred method for allocating retirement benefits, as proration by time (the basis for the coverture fraction) assumes that the same contributions are made in each and every year of employment  an assumption which is untrue in the great majority of cases. Proration by time is used for defined benefit plans only because the complex nature of such plans makes proration by funds impossible to implement.[ [12] ] The few cases that have ruled on this subject are generally in accord. [13] The trial court did not directly disagree with Gary's argument as to how the marital portion of his 401(k) plan should be determined. Instead, the court focused on the fact that the original statements for Jackie's plan were missing for the first one and a half years of their marriage. According to the court, the absence of these statements made accurate use of the proration by funds method as to Jackie's plan impossible. The court concluded that this justified using a time proration method as to both plans. We do not agree that the absence of a year and a half's information concerning Jackie's plan would justify using a method that yields a manifestly inaccurate result as to Gary's plan. There is no indication that Gary should be charged with responsibility for the lack of information concerning Jackie's plan. Further, the difficulties in using a proration by funds method for Jackie's plan seem overstated. Gary's written records of the missing statements were not challenged as to accuracy. His records show that the allocations that Jackie made among the seven investment vehicles [14] available under the plan for the years in question, 1992 and 1993, were the same as those she made for 1994, the first year for which original records are available. Further, according to Gary's records Jackie's rate of return for each year was favorable from the standpoint of increasing the separate property component of her plan. In 1992 her rate of return is shown to be about 9%, whereas his was about 8%, and in 1993 her rate of return was about 11%, approximately the same rate that he achieved during that year. Thus there seems to be nothing inherently unreliable about Gary's records. [15] We conclude that the court erred in dividing the separate from the marital components of Gary's 401(k) plan. We recognize that there may be instances in which so little information is available about the parties' contributions to their 401(k) plans that application of the coverture fraction is warranted, [16] but this is not such a case. On remand the components of the plan should be divided using a funds proration method. With respect to Jackie's plan we believe that the court should also use a funds proration method in order to divide its separate and marital components. In accomplishing this the court may use Gary's records if it finds them credible, or it may use other evidence including reasonable extrapolations from known facts. The superior court should choose the same starting date for each party, even if the court is working with Gary's actual records and extrapolating from Jackie's later records.