Opinion ID: 1145441
Heading Depth: 2
Heading Rank: 3

Heading: application of the principles

Text: We begin with a critical analysis of Schweitzer 's equal sharing of the risk rationale for adopting the pay as it comes in or reserved jurisdiction method of distribution. We note first that Schweitzer has been criticized by commentators, see generally Carter & Myers, supra, but we do not intend in this discussion to review those criticisms. Rather, we intend to provide our own analysis of the shortcomings of the rationale enunciated for the pay as it comes in method. As noted above, the Court's concern in Schweitzer over the lump sum method was twofold: First, the court could award a lump sum benefit in one case which would grant to the non-employee spouse an amount that might not ever be received if either[ [11] ] spouse died before the projected benefits had been paid out; and on a pay as it comes in basis in another case, which would operate to the benefit of the employee spouse whose retirement income would not have to be divided after the non-employee spouse's death. 103 N.M. at 615, 711 P.2d at 892. Second, [t]he inequality would be compounded if the employee spouse died first, having received only a portion of his or her divided share but having paid the ex-spouse the present value of all of his or her estimated lifetime share under the lump sum decree. Id. Thus, the Court focused its concern over the lump sum method on the potential inequality arising from the risk of forfeiture borne by the employee spouse: If he lived longer than his life expectancy, he would realize benefits in excess of those distributed to his ex-spouse on dissolution; if he died before retirement or before living out his life expectancy, with no ability to alienate or transmit at death the value of his pension rights, he would receive less than the value of the rights transferred to his former spouse at the time of divorce. As the Court of Appeals put it in Ruggles below, this Court in Schweitzer was most concerned with the possibility of the employee spouse bearing all the risk of forfeiture and desired instead for both parties to bear the risk.... [The Supreme Court determined] that it is preferable for both spouses to bear the risk of forfeiture equally....  114 N.M. at 69, 834 P.2d at 946. [12] But we think it impossible to devise a system that, in all cases, will result in both spouses bearing the risk of forfeiture equally. Although this is the professed goal of the reserved jurisdiction or pay as it comes in method, its achievement of that goal is illusory. For, while the nonemployee spouse risks losing everything if her husband dies prematurely ( i.e., before retirement), the employee spouse walks away from the marriage dissolution secure in the knowledge that, if he lives past retirement, he will eventually have a pension to protect him in his retirement years. In the meantime, he has a job. He has a source of income (probably amounting to considerably more than the amount he would receive as a retirement pension) and the relative comfort of knowing that his income will probably increase, his eventual pension will probably increase, and upon retirement he will receive a guaranteed lifetime annuity. The nonemployee spouse, to be sure, has some of the same expectations as her former husband; depending on how long he lives and when he chooses to retire, she will eventually share in his pension (to the extent, probably, determined years before at the time of divorce). In the meantime, she may lack employment, and her future security depends entirely on when her ex-spouse decides to retire. The goals of effecting a clean break between the parties and of disentangling them from one another financially have been subverted, and the court has the prospect of relitigating the parties' precise shares of the pension payments when the employee decides to retire. This is not an equal sharing of the risk.
In addition to the equal sharing of the risk theory, another advantage sometimes mentioned for the reserved jurisdiction method is that it avoids the often difficult problems encountered in calculating the present value, at the time of dissolution, of the spouses' community interest in a defined-benefit pension plan. E.g., Fabina, supra, 63 Ind.L.J. at 144 (Since [under the reserved jurisdiction method] only the formula for division is determined at the time of divorce, the complex calculation of valuation is avoided and speculation is eliminated.). Proponents of the reserved jurisdiction approach point out that calculating a present-value lump sum involves at least one, and possibly several, assumptions about such factors as the appropriate interest rate to use in performing a discounted present-value computation, as well as factors concerning mortality, probability of continued employment, probability of vesting, and the like. These assumptions are invariably somewhat speculative; and, say the proponents, such speculation, along with difficult mathematical computations built on them, can be avoided by simply opting to wait and see. Joseph Ruggles makes this argument forcefully, urging that retirement plans are different from other community assets and that Schweitzer provides the perfect different treatment retirement plans should be accorded in divorce actions by avoiding speculation and by freeing the parties (and their attorneys) from the time-consuming and expensive task of litigating, with expert witnesses, over the various assumptions and appropriate methods of discounting in order to adduce evidence of present value. It cannot be denied that in many respects retirement plans are sui generis and are, as Joseph argues, different from other assets whose current values may be more easily fixed. The basic right in a retirement plan is the right to receive a stream of monthly payments at some time in the future. The right is not alienable (except to the extent provided by the REA), and it is subject to various contingencies. When a plan is vested and matured, the first contingency, obviously, is that the employee actually retire and begin receiving payments. However, as Gillmore and Koelsch observed, this condition is entirely within the employee spouse's unilateral control, so we believe that it should not be considered in computing the present value of the employee's interest. Before actual retirement, the right to receive an income stream from the pension plan is also subject to the contingency that the employee's interest will become vested, then the contingency that it will mature, and all along the contingency that the employee will not die. This last contingency most definitely is not within the employee's control; and, as discussed more fully below, we believe it should be taken into account in estimating present value. [13] These contingencies can be evaluated and accounted for using accepted actuarial and statistical techniques. See Johnson v. Johnson, 131 Ariz. 38, 42, 638 P.2d 705, 709 (1981) (en banc) (Various actuarial calculations are used to discount the present value of the retirement plan to reflect contingencies affecting the eventual payout, including discounts for mortality, interest, probability of vesting, and probability of continued employment. (footnotes omitted)); Carter & Myers, supra, at 112 & n. 130, 116-18 (discussing discounting for time value of money and expected values, using standard statistical techniques to discount for probability that given contingency will occur); Murray Projector, Valuation of Retirement Benefits in Marriage Dissolutions, 50 L.A.B.Bull. 229, 233-37 (1975) (discussing discounting for mortality (based on probability that employee of given age will survive to required age) and for plan vesting (based on probability that employee will continue employment for period required to become vested)). It is true that various assumptions must be made in arriving at the present value of a nonemployee spouse's community interest in a retirement plan. There are various contingencies which may affect that present value, the effect of which must be quantified, in many or most cases through the use of expert testimony. However, we do not believe that an expert's informed making of assumptions and evaluation of them based on accepted actuarial and statistical techniques render the outcome any more unacceptably speculative than, say, the computation of earning capacity to establish damages in a personal injury or wrongful death case. See Carter & Myers, supra, at 117 n. 167. In some cases (we give examples below), a trial court may have little choice but to defer distribution and enter a pay as it comes in order. In many other circumstances, however, we believe, for the reasons discussed above in connection with long-accepted community property principles, that an immediate and outright distribution will better serve the parties', and the court's, interests. Finally, we note that the reserved jurisdiction method raises many problems not apparent from its deceptively simple formulation. DiFranza & Parkyn, supra, 55 Cal.St.B.J. at 469 (discussing several such problems, including potential tax consequences). [14] As one commentator has observed: [C]onsider the practical problems of such a long wait [between divorce and actual receipt of retirement benefits]. Her [the nonemployee spouse's] lawyer may die, retire, or leave his firm. His files may be lost or accidentally destroyed, as may those of the court. The waiting spouse may move out of the Court's jurisdiction or simply forget about the distant pension rights. .... Even when the husband has not yet retired, he has the ability to frustrate the wife's receipt of her as-yet-unpaid portion of the retirement benefits. He can change jobs, move across the country, or even, as in some instances, retire in a foreign land; the ensuing legal battle to acquire jurisdiction over the plan administrator and former husband, in order to compel compliance, can be a nightmare. Hardie, supra, 53 Cal.St.B.J. at 110-11.
Based on the foregoing, we decide the cases before us as follows: In Ruggles, for the reasons and subject to the principles discussed below, we reverse the Court of Appeals and remand the case to the trial court to decide the parties' dispute over their marital settlement agreement. If the court finds that the parties agreed on when and how Nancy's share of Joseph's retirement benefits was to be paid to her, then that agreement should, of course, be enforced. We agree with Schweitzer that the rule for distribution of a nonemployee spouse's interest in a retirement plan, whatever the rule is, should be applied only in the absence of an agreement between the spouses on the subject. However, if the parties did not agree one way or the other on when and how Nancy was to receive her interest in Joseph's retirement plan, the court should reinstate its judgment awarding Nancy $753.94 per month as her community interest in Joseph's retirement plan. At the same time, we agree with the Court of Appeals that $182.98 of this amount should be paid directly by Joseph's employer, Sandia, through a QDRO. The court should enter such a QDRO, reduce Joseph's monthly obligation accordingly, and provide for Nancy's full entitlement to be paid to her on Joseph's actual retirement through an increased QDRO. We acknowledge that this resolution of the parties' dispute does not comport with what we have described as the preferred method of satisfying a nonemployee spouse's community interest in an employee spouse's retirement plan  namely, a lump sum distribution, through other assets (including an installment obligation secured by a lien on other assets and bearing interest) and utilizing a QDRO to the maximum extent available, equal to the present cash value of her interest in the plan. However, Nancy has raised no issue about the court's failure to make a lump sum distribution, and Joseph has at no point contended that such a distribution was preferable to the manner in which the trial court divided the pension benefits. In any event, the parties' other assets have been divided pursuant to their MSA, and it would seem unwise to attempt to unscramble the eggs at this point. On remand, however, either party may request the court to revisit the questions of present-value determination and distribution, and the court may exercise its sound discretion in deciding how to deal with any such request. [15] If revisited, the present value of the parties' community interest in Joseph's retirement plan as of the time of dissolution should be determined in accordance with the principles described in this opinion, supplemented by expert or other evidence. In particular, and in addition to discounting for the time value of money (interest or investment yield), the court should apply an appropriate discount to the otherwise determined present value to account for the possibility that Joseph will die before he actually retires. See Projector, supra, 50 L.A.B.Bull. at 233-35. [16] Such a discount can be determined using readily available mortality tables to derive the probability that Joseph will survive from the date of dissolution to the date he attains normal retirement age under his employer's pension plan (which the trial court found was age 65). In this connection, we reiterate that the present value of an employee's interest in a retirement plan, even when the interest is fully vested and matured, is not the same as the employee's right to future pension payments for the rest of his life discounted only for the time value of money. Although we hold in this opinion that a nonemployee spouse is entitled to an immediate distribution when dissolution occurs after the employee spouse's interest is vested and matured, that distribution, if made in a lump sum, does not necessarily equal the present value, discounted only for interest, of the employee's future pension payments. All during the parties' marriage, the spouses' right to receive retirement benefits was contingent upon the employee's actual survival; that contingency survives the marital dissolution and should be recognized in assigning a present value to the community's interest. [17] Thus, when dissolution occurs after vesting and maturity, a present-value determination should be made, applying the principles outlined above, and the nonemployee spouse's interest should be distributed in a lump sum (or comparable distribution) using a QDRO to the greatest extent possible. If a lump sum distribution is not practical or feasible, for any or all of the reasons about to be mentioned, the court may award the nonemployee spouse an amount payable by the employee spouse (reduced by any QDRO amount, if available) equal to the share of the retirement benefit she would be entitled to receive if the employee spouse elected to retire. It must be recognized that any such periodic payment is a form of deferred distribution, even though commencing immediately, and as such is subject to all, or at least most, of the shortcomings of the reserved jurisdiction method of distribution. That is, it does not end the parties' association with one another, does not relieve the court of the necessity to supervise their relationship, and is subject to all of the practical problems inherent in the reserved jurisdiction method. Furthermore, and perhaps more importantly, the nonemployee spouse's right to receive payments from the employee spouse may terminate on the latter's death, is probably (at least as a practical matter) not alienable, and is probably not transmissible at death. Nevertheless, there undoubtedly will be some occasions when this or some other form of deferred distribution should be employed. One such occasion will arise when the court has no satisfactory evidence upon which to make a finding of present value. Another will relate to the parties' financial circumstances: If there are no other assets, or insufficient assets, or unsuitable assets, with which to satisfy (or secure) a lump sum distribution, the court may be forced to award the nonemployee spouse's share as it comes in. A third, and very important, factor is the undesirability of forcing, however indirectly, the employee spouse to retire prematurely and remove himself from the workforce. There may well be other factors that will counsel against use of the lump sum method of distribution and in favor of the reserved jurisdiction method. As already indicated, we leave the choice of method, as well as its implementation, to the sound discretion of the trial court  subject, however, to the preference we have expressed in favor of the lump sum, present value, cash-out method of distribution. In Mick, we similarly reverse the Court of Appeals and remand to the trial court with instructions to vacate its judgment, to the extent that judgment dealt with Norman Mick's interest in his ex-wife Hazel's federal civil service retirement benefits, and to enter a new judgment awarding Norman, effective as of the date Hazel's interest in her retirement matured, [18] a lump sum distribution or, if the factors discussed above in connection with Ruggles indicate otherwise, a periodic payment from Hazel in accordance with the formula already determined by the trial court. As in Ruggles, it may be impracticable at this point to award Norman a lump sum payment of the present value of his community interest in Hazel's retirement plan. In fairness, since the trial court awarded Hazel a portion of Norman's retirement benefits under the state Public Employees Retirement Association system when and if benefits are paid, the court may permit that portion of the judgment to be reopened as well to provide an offset to Hazel's obligation to pay to Norman his share of her retirement plan. In all events, the trial court should equitably adjust the rights of the parties in each other's retirement plans, based on the principles announced in this opinion.