Portability and valuation

Defined contribution plans have actual balances of which workers can know the value with certainty by simply checking the record of the balance. There is no legal requirement that the employer allow the former worker take his money out to roll over into an IRA, though it is relatively uncommon in the U.S. not to allow this (and many companies such as Fidelity run numerous TV ads encouraging individuals to transfer their old plans into current ones).

Because the lump sum actuarial present value of a former worker's vested accrued benefit is uncertain, the IRS, under section 417(e) of the Internal Revenue Code, specifies the interest and mortality figures that must be used. This has caused some employers as in the Berger versus Xerox casecitation needed in the 7th Circuit (Richard A. Posner was the judge who wrote the opinion) with cash balance plans to have a higher liability for employers for a lump sum than was in the employee's "notional" or "hypothetical" account balance.

When the interest credit rate exceeds the mandated section 417(e) discounting rate, the legally mandated lump sum value payable to the employee if the plan sponsor allows for pre-retirement lump sums would exceed the notional balance in the employee's cash balance account. This has been colourfully dubbed the "Whipsaw" in actuarial parlance. The Pension Protection Act signed into law on August 17, 2006 contained added provisions for these types of plans allowing the distribution of the cash balance account as a lump sum.

Portability: practical difference, not a legal differenceedit

A practical difference is that a defined contribution plan's assets generally remain with the employee (generally, amounts contributed by the employee and earnings on them remain with the employee, but employer contributions and earnings on them do not vest with the employee until a specified period has elapsed), even if he or she transfers to a new job or decides to retire early. By contrast, in many countries defined benefit pension benefits are typically lost if the worker fails to serve the requisite number of years with the same company. Self-directed accounts from one employer may usually be 'rolled-over' to another employer's account or converted from one type of account to another in these cases.

Because defined contribution plans have actual balances, employers can simply write a check because the amount of their liability at termination of employment which may be decades before actual normal (65) retirement date of the plan is known with certainty. There is no legal requirement that the employer allow the former worker take his money out to roll over into an IRA, though it is relatively uncommon in the US not to allow this.

Just as there is no legal requirement to give portability to a Defined contribution plan, there is no mandated ban on portability for defined benefit plans. However, because the lump sum actuarial present value of a former worker's vested accrued benefit is uncertain, the mandate under in section 417(e) of the Internal Revenue Code specifies the interest and mortality figures that must be used. This uncertainty has limited the practical portability of defined benefit plans.

Investment risk borne by employee or employeredit

It is commonly saidcitation needed that the employee bears investment risk for defined contribution plans, while the employer bears that risk in defined benefit plans. This is true for practically all cases, but pension law in the United States does not require that employees bear investment risk. The law only provides a section 404(c) exemption under ERISA from fiduciary liability if the employer provides the mandated investment choices and gives employees sufficient control to customize his pension investment portfolio appropriate to his risk tolerance.

PBGC insurance: a legal differenceedit

ERISA does not provide insurance from the Pension Benefit Guaranty Corporation (PBGC) for defined contribution plans, but cash balance plans do get such insurance because they, like all ERISA-defined benefit plans, are covered by the PBGC.

Plans may also be either employer-provided or individual plans. Most types of retirement plans are employer-provided, though individual retirement accounts (IRAs) are very common.