Page 187 - Group Insurance and Retirement Benefit IC 83 E- Book

Advocates of Defined contribution plan point out that each employee has the ability to

tailor the investment portfolio to his or her individual needs and financial situation,
including the choice of how much to contribute, if anything at all. However, others state

that these apparent advantages could also hinder some workers who might not possess the
financial savvy to choose the correct investment vehicles or have the discipline to

voluntarily contribute money to retirement accounts.

Portability, Valuation

Defined contribution plan have actual balances, that workers can know the value of with
certainty by simply checking 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 US not to allow this (and many companies such as Fidelity

run numerous TV ads encouraging individuals to transfer their old plans into current

ones).

However, because the lump sum actuarial present value of a former worker's vested

accrued benefit is uncertain, the IRS (in Section 417(e) of the Internal Revenue) Code
specifies the interest and mortality that must be used. This has caused some employers as

in the Berger versus Xerox case 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 IRS 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, not a Legal difference

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