This article explains how to cross-examine a pension expert in a legal case. It shows that many so-called experts don’t actually understand pension valuation. It also gives criteria for measuring an expert’s expertise, such as their background and training. It explains that actuaries are the most qualified to give opinions on pension value. When questioning an expert about present value calculations, it’s important to ask for detailed justification for the assumptions they used and how they obtained their result. Be wary of generalizations and ask for a thorough explanation of why a specific table was selected for the calculation. It’s also important to understand that retirement plans cannot have a fair market value because they can’t be sold or traded. Additionally, be aware that the term “cash value” does not always equate to present value, and the worth of a benefit depends on the perspective from which it’s being valued. Always ask the expert to explain these distinctions and valuation differences. Basically, when figuring out the value of marital benefits in a divorce, it’s important to make sure the expert didn’t use a life expectancy figure to calculate the result. This would be a big mistake. Also, it’s important to consider that the husband and wife might see the value of the benefits differently. The present value should be based on what the participant could receive, not any other benefits they might get later on. It’s important for the expert to understand the difference between present value and market value. The present value of a benefit is the amount of money it is worth today, taking into account the future payments or lump sum that will be received. Assumptions are used to calculate the present value, and these assumptions can vary depending on the perspective of the person doing the calculation. For example, there is a difference between the present value for an employer’s plan termination liability and that for the employer’s accrued liability, even though they involve the same benefits. These values are important for the employer to know in order to make decisions about their benefit plans. A defined contribution plan determines the amount of money you’ll get in retirement based on how much your employer puts in each year. But there’s no guarantee of how much you’ll actually get – it depends on how well the investments do. The rules for how much you’ll get can also change depending on your age, how much you’ve contributed, and other factors. It’s important to read the whole plan to understand what you’ve earned.
When it comes to figuring out how much you’ll get, some plans use the balance in your account, while others pay out a monthly benefit for life. It’s important to make sure the way this value is calculated is fair.
Another thing to consider is whether the amount you’ll get from your plan should be based on the assumption that you’ve stopped working, even if you haven’t.
In simple terms, a defined contribution plan is a retirement savings plan where your employer contributes money, and what you’ll get when you retire depends on how well the investments do. But it’s important to understand the rules and make sure the way the value is calculated is fair to you. A participant in a retirement plan has an account balance of $120,000 on 12/31/96. The plan’s only valuation date is 12/31, and the employer makes contributions on that date. The parties file for dissolution on 11/1/97, and the account balance is $130,000. The question is whether the $130,000 should be used as the present value of the marital benefit.
The plan requires the employee to work 1,000 hours in the year before any contribution will be made, and the amount of the contribution is based on the amount of compensation earned in that year. It may not be fair to exclude the 10/12th component from the marital portion of the contribution, as it is based on salary earned mostly during the marital period.
On the flip side, if the parties married on 11/1/96, not more than 2/12ths of the 12/31/96 contribution can be attributed to marital efforts. Therefore, the nonmarital portion needs to be adjusted by increasing it by 10/12ths of the contribution made on 12/31/96. Basically, when dealing with retirement benefits, it’s really important to read the plan and understand all the possible benefits and conditions. A lot of people make the mistake of not doing this, especially with defined benefit plans, and end up missing out on extra perks that could be really valuable. This is a big problem, especially when trying to divide the benefits in a divorce. It’s also important to understand the different types of benefits and how to calculate their present value accurately. Some experts might not fully understand how to value certain types of benefits, so it’s important to make sure you’re getting the right advice. The difference between actuarial value and what most lawyers think the present value represents is that present value is based on averages and can be off by a large amount for individual cases. However, when looking at a large group, the errors tend to balance out. Present value represents the most likely current value of a benefit, not its actual value.
Many lawyers understand this, but still use nonactuary calculations based on life expectancies. This assumes the participant will live to their life expectancy and then die, which is almost guaranteed to be wrong. Additionally, these calculations often use life expectancies from census tables, which include people with lower life expectancies than pensioners. The correct way to calculate present value uses pension tables and discounts future payments based on the probability of receiving them. Many pension experts may not actually be qualified to give valuation opinions. Real experts don’t use life expectancies to value retirement benefits, and they don’t rely on benefit statements either. They read the plan document instead, because that’s the only legal document that defines a participant’s benefit rights. Valuing retirement benefits is crucial when dividing marital property, even with a QDRO. An employer who can’t pay its retirement plan may have to end it. If the plan has more money than it needs, it can be sold with the business. If it doesn’t have enough money, it’s harder to sell the business. In a recent court case, the only clear decision was about this issue. Actuaries calculate how long people will live, but it doesn’t really have a financial purpose. Jerry Reiss and Michael Walsh are experts in divorce and family law. They wrote this column for the Family Law Section.
Source: https://www.floridabar.org/the-florida-bar-journal/cross-examining-the-pension-expert/
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