Portability Provisions

Retirement plans may be structured either to penalize participants when they change jobs or to accommodate frequent job changes. Benefits with features that facilitate job changes are said to be "portable." The vast majority of participants in traditional defined-benefit plans do not have portable benefits. Among those who do, the most common portability feature is the ability to transfer service credits. Otherwise, portability can be achieved by taking a lump-sum distribution, when permitted, and rolling it over into an IRA or a defined-contribution plan.

In a defined-contribution plan, participants can almost always take a lump-sum distribution when they change jobs and roll it over into an IRA. Or they can retain their account with the original employer and continue to accrue earnings until they retire. Either way, they are not penalized for changing jobs, so portability is less of an issue.

Transfer of Service Credits

Defined-benefit plans that include a provision for transferring service credits offer participants a degree of portability. Service with one employer is counted as service with a subsequent employer, on the condition that the participant forfeits all pension rights with the first employer. The portability is only partial because both employers' plans have to include such a provision for it to work. Such arrangements are most commonly found among different public-sector plans within a single state--direct portability to other states or to the private sector is not available.⁽¹⁾ In the late 1990s, more than 40 percent of employees of state and local governments had benefits that were portable within the same state. In the private sector, 21 percent of employees of small establishments--mostly those covered by multiemployer plans--had partially portable benefits. Among employees of medium-sized and large establishments, fewer than 10 percent had such benefits.

Rollovers

Rollovers are simply the transfer of the balance of a retirement account to an IRA or a defined-contribution plan. Balances from any plan that allows lump-sum distributions can, in theory, be rolled over, allowing participants to consolidate their retirement savings in one place and thereby simplifying portfolio management and its associated recordkeeping. If the plan making the distribution is a traditional defined-benefit plan, the rollover feature mitigates the penalty for changing jobs. If the plan making the distribution is a cash balance plan or a defined-contribution plan, however, the rollover feature does not facilitate job changes--account balances are preserved whether or not they are rolled over.

For some defined-contribution plans, their design--or before the enactment of EGTRRA, the tax code--prohibited them from accepting rollover contributions. More than 70 percent of all 401(k) participants in 2000 could transfer balances from another qualified plan into their 401(k) account. But until the enactment of EGTRRA, several restrictions remained on rollovers among defined-contribution plans:

1. The balance from an IRA could be transferred to a qualified plan only if the account was a "conduit IRA"-- that is, it was established solely to hold rollovers from other qualified plans and received no other contributions;
   
   
2. The balance from a 403(b) plan could be rolled over into an IRA or into another 403(b) plan but not into a qualified plan; and
   
   
3. The balance from a 457 plan could be rolled over only into another 457 plan.

Now, under EGTRRA, balances from any traditional IRA or defined-contribution plan (except SIMPLEs) may be rolled over into any other traditional IRA or defined-contribution plan. Furthermore, beginning in 2006, EGTRRA permits rollovers between Roth IRAs and their newly created 401(k) counterparts. In no case, however, will plans be required to accept rollover contributions; the new law merely removes statutory prohibitions on such transfers.