09/05/2011 01:31 pm ET Updated Nov 05, 2011

Celebrate National 401(k) Day by Protecting Yourself From Divorce Mistakes

If you're in the middle of a divorce, you might not have noticed that National 401(k) Day is coming up. It does tend to get lost in the shuffle, between getting the kids back to school, vacation, and, well, just about everything else. But since dividing retirement assets may be one of the most important financial aspects of your divorce, National 401(k) Day is a good opportunity to check in and make sure that it is being handled properly. I'm sure you've marked your calendar already, but just in case, this year it is September 9, 2011.

What can you do to make sure that the retirement assets are being divided correctly? If you've hired a lawyer for your divorce, you're probably thinking you don't need to worry about it -- the lawyers are handling all that complicated stuff. I hate to tell you this, but divorce lawyers -- many of whom are wonderful people -- make mistakes with retirement assets all the time. In my work, I deal exclusively with divorce lawyers, their clients, and their retirement plans. It turns out that there are infinite ways to mess up even a simple 401(k) division -- even when there is no disagreement about what each party is supposed to receive.

How is that possible? Most people are surprised to learn that dividing a 401(k) isn't just a matter of filling out a form. It often takes months -- even years -- and a lot of legal fees and headaches. Here's why: employers can't pay retirement funds to anyone other than the employee -- even if the judge says that a former spouse should get part of the pension or 401(k). Under federal law, there is a special mechanism that allows employers to pay retirement benefits to former spouses. The mechanism is a "Qualified Domestic Relations Order" (called a "QDRO"). Most retirement plans cannot make payments to a former spouse until a proper QDRO has been entered by the court and approved by the employer.

Usually, the divorcing couple works out a deal and puts it all into a "Settlement Agreement" that covers everything from dividing their assets and debts to custody of their children. Most of the time, the QDRO isn't done until after the divorce is final. So, it's crucial for the Settlement Agreement to have all the right language in it to make sure that the QDRO gets done right. And this is where most devastating mistakes can be made.

People often think I'm exaggerating when I try to explain just how easy it is to make an enormous mistake. I mean, come on -- how hard can it be to divide a 401(k) evenly between a husband and wife? Here's a simple example. John and Julie work out their divorce deal. John has a 401(k) worth $50,000 on the day they settle their divorce. They agree that each of them will get half of it. Easy, right? Fill out a QDRO that says they each get $25,000 from the 401(k), and move on to more important stuff, like who gets the kids on Christmas.

Here's where the problems come in. The day they made their deal, John and Julie knew exactly what they meant by "dividing the 401(k) in half." But, especially with the stock market swinging wildly, the details matter a lot. If their Settlement Agreement says "Julie gets $25,000 from John's 401(k)," John is going to be really upset a few months from now, when the QDRO is finally finished, if the value of the account has gone down to $40,000. The 401(k) plan will still give Julie $25,000 - even though that's now more than the 50% that John and Julie agreed to! But if their Settlement Agreement just says "Julie gets $25,000," instead of "Julie gets 50% of the account, adjusted for gains and losses in the account between now and when the QDRO is finished," Julie is going to win that argument in court and walk off with more than half of the 401(k).

It's even more painful (at least for John) if the Agreement says "Julie gets $25,000" and the account drops below that amount before the QDRO is complete. John is likely going to have to give Julie 100% of the 401(k), and pay Julie the difference -- from his pocket. Ouch.

While it is not as common nowadays, the reverse also happens: if John's account goes up to $60,000 before the QDRO is finished, John will get a windfall if the divorce Agreement simply says that Julie gets $25,000.

You'd think these mistakes would be easy to avoid, but they are shockingly common. To protect yourself, make sure that you (or your lawyer) know exactly what you and your spouse intend -- and that this is crystal clear in your divorce agreement. Watching the stock market lately, we all know that you can't assume that the value of the 401(k) will stay the same over the months it will take before the funds will be transferred by the QDRO. Think through all the possibilities of what could happen to the account in the meantime, and make sure each situation is covered. What happens if John loses his job or dies before the divorce is over? What if John secretly takes a loan out of the 401(k), leaving less than $25,000 for Julie in the account?

Enjoy National 401(k) Day -- by making sure that you don't end up with less of the retirement than you bargained for.

Emily Widmann McBurney is a lawyer in the Atlanta law firm of Davis, Matthews, & Quigley who specializes in the division of retirement assets in divorces.