3 Analysis of Issues and Recommended Practices

3.1 Overview

Section 3 provides specific guidance for actuaries who undertake one or more of the following tasks in connection with a domestic relations action: performing an actuarial valuation and preparing the related report (section 3.3); participating in adversarial proceedings (section 3.4); providing information on the division of retirement plan benefits (section 3.5); assisting in drafting a court order (section 3.6); and reviewing or implementing a court order (section 3.7).

3.2 Initial Considerations

When undertaking an assignment concerning retirement plan benefits in a domestic relations action, the actuary should do the following:

1. Identify the Client-One or more of the following parties may select the actuary and shall be deemed to be the actuarys client for purposes of this standard:
   
   
   1. the covered party or his or her attorney;
   2. the spouse, other interested party, or his or her attorney;
   3. the judge presiding over the domestic relations action;
   4. the court overseeing the domestic relations action; or
   5. a retirement plan sponsor, administrator, or trustee.
2. Disclose Any Conflicts of Interest The actuary should be alert to the possibility of a conflict of interest and should disclose any actual or potential conflict of interest to all known direct users. A conflict of interest exists whenever the actuarys objectivity, or duty owed to a client or employer, is impaired by competing interests. A potential conflict of interest exists whenever it reasonably appears that the actuarys objectivity, or duty owed to a client or employer, may be impaired by competing interests. For example, a potential conflict of interest exists when the retirement plans enrolled actuary is retained on behalf of the covered party, spouse, judge, or court. Similarly, a potential conflict of interest exists when the actuary has previously performed professional services for or has a personal relationship with the opposing attorney or any other party to the domestic relations action. In these matters, the actuary should be guided by the Code of Professional Conduct, Precept 8, Conflict of Interest.
3. Determine the Nature and Scope of the Engagement The actuary should make certain that he or she has a clear understanding of the scope of the actuarys engagement, and that the scope of the engagement is clearly communicated to the client. For example, if the plan has retained the actuary to calculate the covered partys benefit amounts at various dates as distinguished from being retained on behalf of the covered party or spouse to value the benefit then the actuarys communication and underlying work product should so indicate. Typically, the engagement may include one or more of the following:



1. calculating the covered partys accrued or projected benefit at various dates;
2. selecting an allocation method;
3. selecting actuarial assumptions;
4. performing an actuarial valuation of retirement plan benefits;
5. participating in adversarial proceedings, including reviewing the work of another expert in the domestic relations action, participating in negotiations with another expert, assisting with the attorneys case preparation, and providing expert testimony as to the actuarys opinion of the value or appropriate allocation of retirement plan benefits;
6. providing information on the division of retirement plan benefits;
7. assisting in drafting a court order that will accomplish a division of retirement plan benefits, including providing sample documents; or
8. assisting the plan sponsor or administrator in reviewing or implementing a court order, including interpreting the provisions of the order or expressing an opinion as to whether a DRO is a QDRO (or satisfies other applicable requirements).
9. Avoid the Unauthorized Practice of Law The actuary should be familiar with the rules regulating the practice of law in the jurisdiction where the actuary will be rendering the services and should avoid the unauthorized practice of law. For example, normally it would be inappropriate for the actuary to advise a non-attorney whether a draft court order meets applicable procedural requirements to be a valid order in the jurisdiction. It would, however, be appropriate for the actuary to advise whether the order is consistent with the terms of the retirement plan and whether each partys benefit is definitely determinable from the order.
4. Be Familiar with Applicable Law The actuary should have a general familiarity with applicable law that affects the actuarys work product or opinion. If a conflict exists between this standard and applicable law, compliance with applicable law is not considered to be a deviation from this standard.

3.3 Actuarial Valuation

1. Information Requirements The actuary is responsible for identifying and collecting the information necessary for the actuarial valuation. Such information will typically include the following:



1. the identity of the retirement plan(s) relevant to the engagement and each plans circumstances such as ongoing, frozen, or terminated; qualified, nonqualified, or governmental;
2. relevant retirement plan provisions including benefit formulas, eligibility for participation and for benefit entitlement, ancillary benefits, early retirement subsidies, and optional forms of payment;
3. covered party and spouse information such as employment and plan participation status (active, terminated, vested, disabled, retired); compensation history; dates of birth, hire, plan participation, marriage, separation, or other relevant dates; accrued retirement plan benefits; prior domestic relations orders; and any special circumstances that might materially affect the valuation results; and
4. measurement date when the measurement date is selected by the actuary, such date should be reasonable, and the actuary should be prepared to justify the date selected. The actuary may rely on information supplied by the attorney, plan sponsor, plan administrator, covered party, spouse, or plan record keeper, but the actuary is responsible for reviewing, when practicable, the reasonableness of the applicable data. The actuary should disclose the data used, the source of the data, and any data deficiencies that might materially affect the results.
2. Selecting an Allocation Method When the actuary is responsible for selecting an allocation method, the allocation method should be reasonable, and the actuary should be prepared to justify the selection. The acceptability of a given allocation method may depend on the legal jurisdiction applicable to the parties involved in the action. The following provides the actuary additional guidance regarding the selection of an allocation method.
1. Direct Tracing and Fractional Rule Methods Where not restricted by applicable law, either of the following two types of methods may be used:
1. Direct Tracing The portion of the retirement benefit that is marital property is equal to the actual benefit accrued during the allocation period. For example, in applying direct tracing to a defined benefit pension plan, the portion of the retirement benefit included in marital property would generally be the increase from the accrued (or vested) benefit, if any, at the marriage date to the accrued (or vested) benefit at the allocation date.
2. Fractional Rule The retirement benefit is allocated by multiplying the retirement benefit by a fraction. The numerator and denominator of the fraction may be based on compensation, contributions, benefit accrual service, plan participation, employment, or other relevant data that are used directly in the determination of the accrued benefit. The numerator is equal to the selected measure accrued during the allocation period. The denominator is equal to the selected measure accrued during the total period in which the benefit is earned. When the selected measure is an elapsed time period, this method is commonly referred to as the time rule.


Illustrations of the calculations involved in the above two methods are included in appendix 2. Variations of these basic methods exist. The actuary should provide a complete description of the method(s) utilized.
2. Age- or Service-Dependent Benefits If the covered party has not satisfied the applicable age or service conditions for certain benefits provided in the plan but remains employed by the plan sponsor at the allocation date, the actuary should determine how to allocate the age- or service-dependent benefit. Unless otherwise required by applicable law, acceptable approaches include the immediate termination approach, which values the benefit as if the covered party terminated on the allocation date; and the continued employment approach, which reflects continued covered employment in accordance with selected retirement, turnover, mortality, or disability assumptions.
3. Different Results from Different Methods Different types of allocation methods can produce significantly different results. An actuary working in situations where different methods are used should educate his or her client as to the differences between the methods and the general financial impact of those differences.
3. Actuarial Assumptions When selecting assumptions for an actuarial valuation of retirement plan benefits in a domestic relations action, the actuary should consider limitations imposed by applicable law and the facts and circumstances of the valuation, including each relevant retirement plans circumstances and provisions; information about the covered party and spouse (see section 3.3.1); and past experience and future expectations for the group of which the covered party is a member.


Each assumption selected by the actuary should be individually reasonable and consistent with every other assumption selected by the actuary. The actuary should be prepared to justify each assumption selected.

The following sections (aj) describe assumptions commonly used in valuing retirement plan benefits and factors that the actuary should consider in selecting assumptions for valuing such benefits in domestic relations actions. This list is not intended to be allinclusive; additional assumptions may be required depending on the provisions of the retirement plan being valued, specific circumstances of the covered party or spouse, and unique requirements of the jurisdiction.
1. Discount Rate Unless another assumption is clearly warranted by the facts and circumstances, the discount rate selected for valuing retirement plan benefits in domestic relations actions should be a low-risk rate of investment return, determined as of the measurement date and based on the cash-flow pattern of benefits being valued (for example, the current or a recent average yield to maturity on U.S. Treasury bonds of comparable duration, or a published index reflecting yield rates for high-quality corporate bonds).
2. Mortality Assumption A mortality table that is generally accepted for valuing annuities or pension benefits, or a table that reflects the expected mortality experience of plan participants, is generally appropriate. However, in some cases it may be appropriate to adjust the mortality assumption to reflect the health of the covered party or spouse.
3. Annuity Purchase As an alternative to selecting a discount rate under section (a), and a mortality assumption under section (b), the actuary may assume the cost of the purchase of an immediate or deferred annuity contract, as appropriate, from an insurance carrier. Typically, this may be done by using an actual insurance survey or by reference to published tables that are derived from such surveys.
4. Retirement Assumption The retirement assumption may be a single assumed retirement age or a table of retirement rates by age. The retirement assumption should reflect the applicable facts and circumstances, such as the following:
1. the plans normal retirement age;
2. the ages at which the covered party is first eligible to retire, to receive subsidized early retirement plan benefits, to receive unreduced retirement plan benefits, to receive Social Security benefits, and to receive Medicare benefits;
3. plan participants average retirement age and retirement rates by age (if known to the actuary), or norms as to retirement age in the covered partys industry or profession;
4. the availability of medical and other post-retirement plan benefits;
5. the level of total retirement plan benefits; or
6. the covered partys income level, job position, and family circumstances.


Statements made by the covered party or spouse as to anticipated retirement age may also be considered, but should not be given undue weight because such statements may be self-serving and the domestic relations action itself may alter retirement planning decisions.
5. Cost-of-Living Adjustments If the retirement plan automatically adjusts benefits for increases in the cost of living, the actuarial valuation should generally reflect expected future increases in benefits attributable to such cost-of-living adjustments. In some cases, it may be appropriate to make an assumption about future ad hoc cost-of-living adjustments.
6. Disability Assumption A disability assumption may be required if the plan provides special benefits upon disability and if including a disability assumption would materially affect the valuation results. A disability table that is generally accepted for use in valuing annuities or pension benefits, or a table that reflects the expected disability experience of plan participants, is generally appropriate. However, in some cases it may be appropriate to adjust the disability assumption to reflect the health of the covered party.
7. Turnover Assumption An assumption as to the rate of participant termination may be required if the benefit is not yet vested or the benefit amount depends on future service. However, some jurisdictions permit only involuntary termination to be reflected when valuing retirement plan benefits in domestic relations actions. The turnover assumption should reflect the specific facts and circumstances, such as the following:
1. the actual or expected turnover experience of plan participants (if known to the actuary);
2. the covered partys age and service;
3. the covered partys job position; and
4. plan provisions such as the age and service required to receive subsidized early retirement plan benefits.
8. Compensation Scale While it is common for the actuarial valuation of retirement plan benefits in domestic relations actions to reflect compensation through the allocation date only, some methods, and some jurisdictions, require the actuary to consider future levels of compensation. For example, a compensation scale may be appropriate when the retirement plan automatically adjusts accrued retirement plan benefits based on compensation increases for the covered partys last position, title, or pay grade, regardless of whether the covered party remains employed.
9. Growth of Individual Account Balances Some retirement plan benefits have components directly related to the accumulation of real or hypothetical individual account balances (including defined contribution plans, floor-offset arrangements, and cash balance pension plans). An assumption regarding the future investment return earned by the actual or hypothetical accounts may be required to value benefits under such plans. Unless another assumption is clearly warranted, this assumed rate of investment return should generally equal the discount rate.
10. Variable Conversion Factors Valuing certain retirement plan benefits may require converting from one payment form to another, such as converting a projected individual account to an annuity or converting an annuity to a lump sum. If the conversion basis is variable (for example, recalculated each year based on a stated mortality table and an interest rate equal to the yield on 30-year Treasury bonds), an assumption regarding future conversion rates may be required.
4. Valuation Process An actuarial valuation should generally involve the following steps:
1. identify the measurement date, the allocation date, the allocation period, potential retirement plan benefits, the contingencies that may affect payment of those benefits, and any special requirements of the applicable legal jurisdiction;
2. project the timing and amounts of potential benefit payments, applying the selected or prescribed allocation method and applicable economic assumptions, and assuming that any required contingencies are met;
3. calculate expected payments by multiplying each potential benefit payment determined in section (b) by the probability that the required contingencies are met, and applying the selected or prescribed demographic and other assumptions; and
4. discount the expected payments determined in section (c) back to the measurement date, using the selected or prescribed discount rate.
5. Computing After-Tax ValuesIn some cases, the actuary may be asked for an opinion of the after-tax actuarial present value of retirement plan benefits. If the actuary has sufficient training or experience, the actuary may prepare such calculations even though the actuary may not be a credentialed tax practitioner. Responding to such requests will generally involve making a number of additional assumptions, such as the potential rate of taxation of retirement plan benefit payments and the tax rate applicable to investment returns. The actuary should disclose such assumptions and be prepared to justify each assumption.
6. Prescribed Dates, Methods, and Assumptions Applicable law may specify or restrict the measurement date, the allocation date, the allocation method, some or all of the actuarial assumptions, or the process the actuary should use to select the measurement date, allocation date, allocation method, or actuarial assumptions. In other situations, the parties to the domestic relations action may stipulate or request the use of alternative measurement dates, allocation dates, allocation methods, some or all assumptions, or the selection process. In such jurisdictions or situations, the actuary should use the prescribed measurement date, allocation date, allocation method, actuarial assumptions, or selection process. Each nonprescribed date, method, and assumption selected by the actuary should be reasonable and consistent with every other nonprescribed assumption selected by the actuary, and the actuary should be prepared to justify each selection. When the actuary uses a prescribed measurement date, allocation date, allocation method, actuarial assumptions, or selection process, the actuary should disclose the prescribed items and the source. The actuary may also choose to present results using the actuarys own best estimate dates, methods, and assumptions in addition to providing the results using the prescribed dates, methods, and assumptions.
7. Consistency with the Actuarys Previous Actuarial Valuations The actuarial valuation should be objective and reasonable. Unless the dates, methods, or assumptions are prescribed, or the facts and circumstances dictate otherwise, the actuary should generally use the same process to select dates, methods, or assumptions for all actuarial valuations in the same jurisdiction. The actuary should not select different dates, methods, or assumptions than the actuary would ordinarily use solely to accommodate the litigation position of the actuarys client. If the actuary uses a different selection process, the actuary should be prepared to explain the change from the actuarys previous selection process in the same jurisdiction.

3.4 Participating in Adversarial Proceedings

1. Reviewing the Work of Another Expert The actuary participating in adversarial actions may be asked to review the work of another expert. The actuary should conduct this review objectively, in terms of the reasonableness of the other experts opinion, rather than solely in terms of whether it agrees or disagrees with the actuarys own opinion. In reviewing another experts work, the actuary should generally follow the steps below:
1. review the basic facts of the situation used by the other expert (see section 3.3.1);
2. review the allocation date, allocation method, and actuarial assumptions used;
3. determine whether any material computational errors have occurred;
4. summarize the findings with respect to sections (a), (b), and (c) that would have a significant impact on the valuation results; and
5. report these findings to the client, including the actuarys assessment of the reasonableness of the other experts opinion.


The actuary should be aware that the parties may use these findings to form an opinion on whether to litigate or settle the issue of retirement values, and should therefore strive neither to minimize legitimate differences of opinion nor to magnify immaterial differences.
2. Submitting Work for Review by Another Expert The actuary participating in adversarial actions may be asked to submit work for review by another expert. The actuary should not submit work for review without the express consent of the client or the clients authorized representative. The actuary should request guidance from the client as to the scope of material that may be disclosed. To the extent authorized, the actuary should be prepared to disclose the type of information described in section 3.4.1. Any authorized contact should be conducted in accordance with the Code of Professional Conduct, Precept 11, Courtesy and Cooperation.
3. Participating in Negotiations with Another Expert The actuary may be asked to participate in negotiations with another expert to identify any differences (see section 3.4.1), and, possibly, to settle on a compromise value to which the parties can stipulate, thus avoiding litigation costs. The actuary should request guidance from the client as to the scope of the actuarys negotiating authority and the scope of material that may be disclosed. The client has the ultimate responsibility for any agreed-upon positions. The result of such negotiation with another expert might be a suggested stipulation or a list of irreconcilable positions that must be resolved.
4. Providing Expert Testimony The actuary participating in adversarial proceedings may be asked to provide expert testimony. The actuary undertaking such an engagement should be familiar with, and comply with, all relevant actuarial standards of practice and general standards for the conduct of professional practice. Before providing expert testimony, the actuary should review data, materials, and documents that are relevant to the subject on which the actuary is expected to testify.


When testifying as to the differences between the actuarys opinion and another experts opinion, the actuary should do so factually. For example, such testimony may take the following forms:
1. showing that data currently available call into question a key assumption, method, or conclusion of the other expert;
2. showing that the two conclusions do not conflict as much as they appear to, or that the difference is not material;
3. showing what kinds of data may become available in the future to support one or the other set of assumptions or conclusions; or
4. showing the effects of different dates, methods, or assumptions.

3.5 Providing Guidance on the Division of Retirement Plan Benefits

3.6 Assisting in Drafting a Court Order

3.7 Assisting in Reviewing or Implementing a Court Order

1. Reviewing a Court Order To be a QDRO, a domestic relations order must satisfy the qualification requirements of IRC section 414(p) and ERISA section 206(d). The actuary may offer an opinion as to whether a particular order meets the qualification requirements. However, the actuary should bear in mind that one of the requirements is that the division of retirement plan benefits must be pursuant to a judgment, decree, or order under the domestic relations law of a state. If the order being reviewed fails to meet the procedural requirements of the court, it may not be a valid court order. The question of whether the proposed order meets the states procedural requirements is a legal one and is beyond the qualifications of actuaries who are not also attorneys.


The actuarys opinion as to whether a DRO is a QDRO or satisfies such other requirements as may apply to the specific type of court order and retirement plan should clearly state the scope of such opinion. For example, if the opinion is limited to an examination of the technical content of the order and does not extend to the legal form of the order, the opinion should so state. If the actuarys opinion is intended to cover both the technical content and the legal form of the order, the actuary should beware of possible unauthorized practice of law (see section 3.2.4).
2. Assisting in Implementing a DRO The plan sponsor or administrator responsible for implementing a DRO may retain the actuary to determine the benefit amount payable to the spouse or covered party in the various forms of payment available under the provisions of the plan, the DRO, and other governing document(s). This may include determining the amount of actuarially equivalent optional forms of payment in accordance with the plan provisions (including the plans definition of actuarial equivalence) and any relevant applicable law. If the terms of the DRO or retirement plan are ambiguous, if the plan is silent, or if the DRO and plan conflict, the actuary may offer an opinion as to the appropriate interpretations or resolutions. However, the plan administrator or other authorized plan representative must make the final determination of the benefit amount that will be paid.