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Deciding upon the best method for distributing retirement benefits can be one of the most difficult problems faced in a divorce. Most states do not prescribe one method as being superior or preferable to another, but instead provide the court with options. The two most common methods of distributing retirement benefits in divorce are the Immediate Offset Method and the Deferred Distribution Method. The Two Methods of Distribution The major difference between the Immediate Offset Method and the Deferred Distribution Method is the time at which the division of benefits occurs. Under the Immediate Offset Method, the court determines the present value of the retirement benefits and then awards the spouse a lump sum interest in cash or other property. In other words, the spouse receives an interest in other property owned by the parties which offsets his/her interest in the pensionholder's benefit, and the pensionholder retains full ownership rights to the retirement benefits. The Deferred Distribution Method does not provide for an immediate division of the benefits. Instead, the court determines the percentage interest or specific dollar amount to be awarded to the spouse, and orders that the spouse receive this award when the pensionholder is eligible to receive retirement benefits. In most cases, the pensionholder will not be eligible to receive retirement benefits until a date some time in the future. Therefore, distribution of the benefits is deferred until a point some time in the future. This method of distribution is accomplished by a Court Order (example - Qualified Domestic Relations Order). Strengths and Weaknesses of Immediate Offset Method The two methods of distribution have their own sets of strengths and weaknesses. The primary strength of the Immediate Offset Method is that it completely resolves the issue of dividing the pension at the time of the divorce. The benefits are divided, and each party walks away from the table with their respective portion at the time of the divorce. Due to the often adversarial nature of divorce, divorcing parties are notoriously apt to pursue litigation and continue fighting over unresolved issues even after the divorce is final. Therefore, the battle could continue long after the parties are divorced, thus creating additional legal bills and litigation costs and occupying the court's time. By using the Immediate Offset Method all issues are resolved, thereby eliminating the possibility of future litigation. The weakness of this method lies within the notion that the court must base its decision on assumptions rather than absolute fact. In order to use the Immediate Offset Method, the present value of the retirement benefits must be determined. The present value is determined using actuarial assumptions relative to the pensionholder's projected lifespan. These actuarial assumptions measure the probability that the pensionholder will reach retirement age, thus entitling him/her to benefits, and the length of time beyond his/her retirement date that benefits are expected to be received. These projections are based upon averages. Therefore, the present value of the benefits will be correct based upon the average case. However, no case is exactly average. In the event that the pensionholder would die prematurely before he/she reaches retirement age, the spouse would have received his/her interest in the retirement benefits at the time of divorce, which due to the death of the pensionholder, were never actually received by the pensionholder. Therefore, one party received an interest in an asset which never flourished for the other party. Due to this pitfall, some court's have decided that the Immediate Offset Method places an uneven amount of risk on the pensionholder as compared to the spouse. The pensionholder ends up having to trade current dollars for future dollars which bare the risk of never being received. However, this summation of an uneven balance of risk is inaccurate. Inherent in the present value analysis is a discount to reflect the likelihood that the pensionholder will not live long enough to retire and receive benefits. Following is a very basic example intended to illustrate the risk associated with Immediate Offset. The present value of the pensionholder's retirement benefit is $50,000, assuming that he/she is currently age 65. However, on the date of the divorce the pensionholder is only 50, therefore, the present value is discounted to $25,000 to account for the 15 year deferred period until retirement. If the parties are going to divide the retirement benefits on a 50/50 basis using the Immediate Offset Method, the spouse would be awarded $12,500 at the time of the divorce, in lieu of his/her interest in the pension. If the pensionholder does not live to age 65 and begin receiving benefits, the spouse has been awarded a $12,500 windfall. However, if the pensionholder does live to age 65, the true value of the benefit was $50,000 of which the spouse would have had a 50% interest or $25,000. Therefore, the pensionholder receives a $12,500 windfall if he/she lives long enough to receive benefits. Therefore, as you can see, the real weakness of this method lies not in the balance of risk, but that the risk exists at all. As stated earlier, the present value analysis is based upon averages. A discount is applied to account for the probability that the pensionholder will not live to retirement. The likelihood of life after retirement is then based upon an average. The calculation of present value is exactly correct in the average case. However, the average scenario never exists. Therefore, the present value is never exactly correct relative to the case at hand. Based upon this, use of the Immediate Offset Method will always shortchange someone. However, who will be shortchanged is unknown. Therefore, both parties are wagering the benefits. The Immediate Offset Method always has some mechanical problems. As discussed earlier, the court must decide on an appropriate present value of the retirement benefits. This can be difficult. The court must decide whether or not the assumptions used in the present value analysis are legitimate, and thereby, either accept or reject the final conclusions of value. Since many of the pieces involved in this analysis are assumptions and not fact, such can be the cause of arguments and litigation between the parties. Strengths and Weaknesses of Deferred Distribution Method The primary strength inherent in the Deferred Distribution Method is that it avoids the risk of harm to either party. Since this method distributes benefits as they are actually received and not based upon an analysis of what would happen in the average case, there is no risk of awarding a windfall to one party or shortchanging the other party. It is believed that under this method, the parties equally share the risk associated with receipt of benefits. If the pensionholder dies prior to retirement, in some cases, the spouse's interest in the benefit terminates. Therefore, each party receives nothing in the event of the pensionholder's premature death. However, the pensionholder is no longer alive to receive benefits, but the spouse is alive and left without a source of income. Therefore, it could be argued that this method of distribution does not necessarily protect both parties from harm since the spouse obviously bears all of the financial harm associated with the risk of the pensionholder's untimely death. Another strength of the Deferred Distribution Method is that it allows each party to pay the appropriate income tax on the share of the benefits received. The assets traded in an Immediate Offset do not always have the same tax liabilities. The Deferred Distribution Method provides for benefit checks to be mailed to each party. Therefore, each party is responsible for the tax on the benefits they receive. The Deferred Distribution Method has three primary weaknesses. The nature of the Deferred Distribution Method provides for a division of retirement benefits at a date in the future. Therefore, there is not a complete and final division of property at the time of the divorce. The parties maintain a relationship, of sorts, until these benefits are distributed. This is in direct opposition to the ultimate goal of a divorce, for neither party is truly able to make a fresh start free and clear of the other person. Another problem found with the Deferred Distribution Method is that receipt of benefits by the spouse is contingent upon the survival of the pensionholder. In some cases, the unexpected death of the pensionholder will cause the spouse's rights to benefits to terminate. Therefore, the pensionholder's death can either jeopardize the spouse's retirement security or eliminate it all together. The third and most significant flaw in this method is that, in reality, it is not always a simple task to determine the amount of the retirement benefits to be received by the pensionholder. In most cases, the plan will offer its employees a variety of benefit options to choose from at the time of retirement. Each of these options can generate a different monthly retirement benefit. Therefore, the pensionholder can make choices or not make choices, long after the divorce, which will affect the amounts to be paid to either party. These choices do not always directly relate to the honesty of the pensionholder. The pensionholder can unintentionally make choices which adversely affect the spouse's rights. Following is a summary of a list one court developed addressing these elections:
Reserved Jurisdiction Method A small number of courts have recognized a variation on the Deferred Distribution Method for division of retirement benefits in divorce. This method, known as the Reserved Jurisdiction Method, provides the court with the ability to determine an appropriate award of benefits for the spouse, later, at the time of the pensionholder's retirement, instead of establishing this award at the time of the divorce. The advantages to using the Reserved Jurisdiction Method are similar to those discussed for the Deferred Distribution Method. That is the distribution of benefits to the spouse is based upon actual post-divorce facts and not upon an estimate of value predicated on assumptions about the average case. However, there are serious problems associated with the Reserved Jurisdiction Method. The Court must hold a hearing at time of the employee's retirement to revisit this issue. Since the spouse's interest in the benefits would most probably be based upon only those benefits which accumulated during the course of the marriage, it does not seem necessary or advantageous to wait until a date in the future to decide an appropriate award. Holding a second hearing at a date in the future consumes the court's very valuable and precious time, and revisits issues that should have been addressed long ago. Further, the players involved in the case, such as the original attorneys, the judge, witnesses, may not be available at the time of the second hearing. This could lead to a rehash of old forgotten issues. Given these problems, there is no suitable reason to choose the Reserved Jurisdiction Method over the Deferred Distribution Method. 
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