The `portable pension': an issue for '88, but more could be using it now

Have you ever tried to pick up a ``portable'' sewing machine, or carry a ``portable'' dishwasher? If you have, you understand the kind of problem many people have had with pension ``portability.'' Carrying retirement benefits from one employer to another can be complicated, time-consuming, and cumbersome. But some help may be coming from Congress. And while pension portability probably won't be the hottest issue of the 1988 presidential campaign, many young professionals who change jobs frequently will be watching to see what stand the candidates take on the issue.

Meanwhile, pension experts say, workers already have some portability rights they don't know about or aren't using.

Simply put, portability means taking the money that's built up in a pension plan and either combining it with the pension account at your new employer or - more commonly - rolling it over into an individual retirement account (IRA). If you're willing to pay the taxes and penalties, you can also take the money and keep it.

Portability is somewhat easier in a ``defined contribution'' plan, says Frank McArdle, spokesman for the Employee Benefit Research Institute in Washington. In a defined contribution plan, the employee contributes all or part of the money, either through a 401(k) or 403(b) salary-reduction system, a money purchase plan, or some other method. Thus, there is a well-defined amount of money that belongs to the worker and can be taken out when he or she changes jobs.

With a ``defined benefit'' plan, the employer simply promises a certain pension at retirement. A partial pension is granted after the employee is fully vested, which has been 10 years at most companies. Under the 1986 Tax Reform Act, employers have until 1989 to adopt plans that vest workers faster. They will have two vesting choices: They can either grant full vesting after five years or 20 percent of their benefits after three years and 100 percent after seven years. Most companies are expected to adopt the five-year method to keep administrative costs down.

Having gone that far, Congress is looking to go a little further. A bill in the Senate, for instance, would make it easier to transfer pension benefits from job to job. That would please pension experts who have seen many people change jobs, take the money out of their old pensions, and spend it.

``People in higher tax brackets do tend to roll it over into IRAs,'' says Alan Woodruff, a partner who heads the Boston office of Coopers & Lybrand's actuarial, benefits, and compensation division. ``They can avoid paying taxes on the money and shelter more income.''

It's people in lower brackets who are apt to spend the money, he notes, ``and they are probably the ones who need to save it the most.''

Ever since the Employee Retirement Income Security Act of 1974, workers who changed jobs have had the right to roll over pensions into IRAs. That law also gave them the right, if they were later rehired by their former company, to restore their previous vesting by paying back the money thay had taken out of the plan.

Another law, the Retirement Equity Act of 1984, extended the time an employee can be gone from a company and be eligible to regain previous vesting. Employers now have to permit at least five years absence from the company and have to include this ``bridging rule'' in their pension and profit sharing plans.

Mr. Woodruff would like to see Congress make it easier for a new employer to accept the pension benefits from a worker's old employer. ``Many companies don't want to do this because the cost of administering pension plans is so high,'' he explains. ``They say `Why should we pay to manage a portfolio from another company?'''

Congress might, he suggests, let employers deduct some of the additional costs of taking on a new employee's pension.

In the meantime, workers who change jobs and have several thousand dollars of pension benefits should probably look for ways to keep these assets in some kind of a retirement account. An IRA at a bank or in a money-market fund generally won't give the rate of return needed for a comfortable nest egg at retirement, Woodruff says. ``I'd go the institutional route,'' he recommends. ``The Fidelitys, Merrill Lynches, and Kidder Peabodys out there have products that will give you a better rate of return.''

The best route, if it's available, Woodruff says, is to take the money out of the old employer's pension fund and put it in a fund at the new company. This is easier if the new company has a savings plan like a 401(k), where you can choose from a range of mutual funds or annuities, avoid the taxes and penalties, and keep your retirement kitty growing.

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