State Law Considered for QDROs for Domestic Partners

The Alaska Supreme Court ruled unmarried domestic partners have a right to some retirement benefits via a qualified domestic relations order (QDRO).

The top Alaska court agreed with an earlier ruling that insurance death benefits and 401(k) retirement accounts are not to be considered domestic partnership assets and therefore should not be subject to division through a qualified domestic relations order (QDRO). However, both the upper and lower courts agreed that accrued union pension benefits can be considered domestic partnership assets and are therefore subject to division between separating domestic partners.

The court cited a previous ruling from the 9th U.S. Circuit Court of Appeals to back up its decision, Owens v. Auto Machinists Pension Trust, which concerned an unmarried couple who had cohabited for 30 years. In that case, the court determined that the woman should receive half of the man’s monthly payments from an Employee Retirement Income Security Act (ERISA)-covered pension acquired during the relationship. When the woman sought her portion, the pension fund administrator notified her that because the couple had not been married, the trial court’s order was not enforceable under ERISA. The woman filed and prevailed on a judgment action in federal district court, and the plan administrator appealed to the Ninth Circuit.

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The 9th Circuit, in turn, started its analysis by noting that ERISA only recognizes orders that relate to “marital property rights” and concern an “alternate payee,” which is defined to include an “other dependent.” The case therefore turned on the meaning of “marital property rights” and whether the woman was an “other dependent.” The court reasoned that because federal law does not define “marital property rights,” the court must apply state law to define the term. This led the court concluded that “Washington recognizes quasi-marital relationships for purposes of property division,” case documents show.

The QDRO questions in Raymond Boulds vs Elena Nielsen reached Alaska’s Supreme Court on appeal from the Superior Court of the State of Alaska. According to the court opinion, defendant Raymond Boulds and plaintiff Elena Nielsen were unmarried cohabitants for 16 years and raised several children together. When their relationship ended, they litigated child custody and property ownership. Substantial disagreement arose when it came to dividing up Boulds’ three distinct retirement benefits, which included an insurance death benefit, a 401(k) account and an accrued union pension benefit.

In short, the superior court decided that, under the rules set out in ERISA, only Boulds' pension benefits can be divided through a QDRO. Boulds, not wanting to divide any of his retirement benefits, appealed the decision.

When Boulds was first hired by his employer, he listed Nielsen as his intended pre-retirement death beneficiary for the union pension, even though the form specified that only a spouse, child, parent, or sibling could be listed. Boulds’ employer told him approximately one year later that he could not list a cohabitant. He then listed his children as the beneficiaries.

After the relationship ended the parties engaged in a series of child custody and property division proceedings. The lower court determined that the employment death benefit and 401(k) account were Boulds’ separate property and that the union pension was partnership property. The court divided the domestic partnership assets equally, but has not yet issued an order dividing the union pension.

In his appeal, Boulds argued that federal law prohibits dividing his union pension with a non-spouse, and that the superior court misapplied Alaska law by examining only Boulds’ own initial intent to share the union pension with Nielsen for the benefit of their children. Boulds argued that the superior court erred in determining that Nielsen was entitled to part of his union pension for two reasons, first because ERISA prohibits division of a federal retirement account with a non-spouse, and second because the court erred by determining that the parties intended the union pension to be a partnership asset. The supreme court ruled neither of these arguments has merit.

"Boulds argues that the superior court lacked authority to award any of the union pension to Nielsen because 'it is illegal under ERISA,' which Boulds argues preempts state law. We assume Boulds is contending that cohabitants cannot hold 'marital property' and that Nielsen does not qualify under the enumerated domestic relations order recipient categories. Boulds is incorrect. The superior court did not err when it divided the union pension between cohabitants under Alaska law, and this outcome is not inconsistent with ERISA," the court opinion states.

The text of the Alaska Supreme Court decision is available here.

Are Mutual Fund Managers Driven to Perform?

A recent analysis from Gerstein Fisher challenges the notion that mutual fund managers don't have as much incentive to outperform as peers running other fund types.

A paper from the investment services provider shows a mutual fund that earns 10% more than the size-weighted average of its style group in one year will, on average, experience a 5% excess asset growth in the subsequent year—mainly by attracting new investors. The findings were consistent across nearly all fund styles and sizes, researchers explain, except for startup funds and very large fixed-income vehicles.

Researchers say this result debunks the common notion that mutual fund managers aren’t driven to outperform because they are typically compensated solely based on asset levels in their fund—with no performance incentives per se. But as the data shows, outperforming mutual fund managers will, in fact, see their assets under management grow as more investors pile into the fund, meaning they have a financial interest in seeing their fund succeed.

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Contributors to the paper include Gregg Fisher and Zakhar Maymin, of Gerstein Fisher, and Philip Maymin, of New York University. The team consulted data from the Center for Research in Security Prices Survivor-Bias-Free U.S. Mutual Fund Database both for monthly fund values and categorization information, utilizing performance data ranging back to December 1985. Fifty-four funds styles were used in the analysis.

One important insight gleaned from the effort is that the amount a fund can expect its future assets to grow as a function of its current outperformance depends heavily on the fund style and size, Gregg Fisher, CIO for Gerstein Fisher and portfolio manager of the Gerstein Fisher Funds, tells PLANSPONSOR.

Overall, across all fund styles, an outperforming mutual fund can expect future asset growth to increase if its current size is between $250 million and $2 billion, Fisher explains. The peak of the positive impact of current outperformance on future asset growth comes around $250 million, when the “coefficient of growth” derived through regression analysis is 0.5. As the researchers explain, a coefficient of 0.5 in this context means a fund outperforming its benchmark by 10% can expect additional asset growth relative to its benchmark of 5% over the subsequent year, net of future excess returns.

Fisher says his firm decided to conduct the research after years of hearing questions from clients about which incentive model is preferable—the asset-based fees typical of mutual funds or the performance-bonus arrangement more frequently used in hedge funds. Clients buying mutual funds are often worried the fund manager will not be driven to outperform his benchmark, Fisher says.

"I think one of the overall lessons here is that good people and good managers will do good things, and bad people and bad mangers will do bad things," Fisher says. "We found there is really no inherent advantage from one incentive model or another."

Fisher is quick to add that the overall picture may obscure the different results observed within different fund styles. For example, the impact of outperformance on equity fund inflows are significant from $250 million in assets and above, continuing to be significant even above $2 billion, with a coefficient on average of about 0.5. remaining in place far beyond $250 million in assets. For fixed-income funds, on the other hand, current outperformance is only mildly significant for funds with $250 million to $2 billion in assets. This class shows a much lower coefficient of growth, at approximately 0.2, according to the researchers.

Mixed fixed-income and equity funds offer a combination of the two, Fisher says, with significance across all asset sizes above $250 million and an average coefficient slightly higher than the equity funds. Researchers say other fund styles are roughly similar to mixed fund styles, with the important difference that they start showing significance at a minimum asset size of $500 million.

According to the authors, these results should be helpful to plan sponsors and financial advisers when deciding whether to pursue or employ potential alpha-generating strategies. They also suggest, Fisher says, that it's probably not necessary for retirement plan investors to fret about the motivations of the managers running their investment options. After all, no fund will benefit from poor performance, he says.

Fisher says the research could also go a long way to dispel the assumption that fund managers with performance-based incentives will be more engaged than managers compensated through fees based only on asset level. Fisher says this arrangement has historically suggested to some that mutual fund managers are less inclined to pursue innovative strategies that may generate excess return.

Not so, the researchers conclude. They argue the excess future inflows observed for outperforming funds imply that mutual fund managers should always prefer to increase their alpha, even if they are already beating their own benchmarks or peers. In other words, better performance leads to more assets, regardless of fund type, which leads in turn to higher manager compensation.  

“In particular, we have shown using a clean historical mutual fund database that an excess return in one year relative to one’s peers leads to additional excess asset growth in the subsequent year,” the team writes. “As a rule of thumb, the future excess asset growth will be about half as much as the current excess return.”

More on the research is available here.

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