Remember high school physics? Isaac Newton framed his laws of motion in the 1600’s. One of those laws, the law of inertia, says that a body at rest will stay at rest until acted upon by another force. We’re going to need Isaac back to explain the new laws of money in motion because of changes to the rollover rules.

The pension laws now allow a free-for-all in portability. Retirement money can move freely between plans and IRAs. These rules create an environment that would make Newton spin in his grave.

The new law of "money in motion" is this: Pension money will never remain at rest for long, and if resting may be put in motion at any time, even for no apparent good reason.

Background "Pension portability" refers to the ability of an employee to move his or her retirement money from plan to plan or IRA. The more portability the better, I say. People need flexibility and control over their retirement funds when they move from job to job, from job to retirement/unemployment, or from retirement/unemployment back to a job.

Before the most recent pension law changes, portability was limited. Under a bunch of silly rules, retirement money could be rolled over from some plans but not others. So-called "conduit IRAs" were needed as holding tanks for pension money if the employee did not have immediate access to a new plan at a new job. And, if you didn’t comply with complex conduit IRA rules, you were just out of luck on rolling the money into that new plan.

The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") changes all that. I don’t want to get into all the technical nuances here, but generally speaking, retirement money can be moved by participant rollovers among qualified plans, IRAs, 403(b) plans, and governmental 457 plans pretty much unfettered.

First, let’s see the practical advantages and long term effects of these new rules. Then, let’s see how we can abuse the new rules to our advantage. These are tax laws, after all.

New Advantages The new portability rules will change the landscape of retirement investments and money management. Here are my thoughts.

Employers will have a greater incentive to distribute account balances to former employees. Maintaining accounts for former employees is expensive. The money has to be managed, there are fiduciary obligations, and annual expenses for statements, mailings, etc. add up. I expect that most plans will permit and encourage former employees to take a rollover and move on.

Employers will have a greater incentive to stick with only plain vanilla investments in plans. Employers will want plan investments that allow easy portability. Many plans have unconventional, exotic, or hard to move investments. Annuities, insurance, and real estate, like excellent wine, do not "travel well." Some investments have "back end" fees that prevent the cash out of former participants.

The financial services industry will promote investment packages that facilitate portability. The mega-players in the business, such as Fidelity, Vanguard, Putnam, Schwab, and the big brokerages, have the advantage. They can provide products and services that accommodate "no-brainer" participant rollovers. Changing jobs? No problemo. They will move your account balance, in tact, to wherever you go if you simply call an 800 number. The participant’s retirement plan relationship will be more closely connected to the investment vehicle rather than the employer’s plan. The biggies will provide easy portability.

Investment costs may go down. Employers will shop for plan investments that are easy to move. Employers will have more of an incentive to ask who is paying for what and when. Back end loads, for example, do not accommodate hassle-free rollovers.

There should be an increased emphasis on employee education for investments and brand loyalty. Again, if the biggies in the financial services industry want to keep long term customers, they have to be sure that when those participants change jobs they will stick with the same investment provider.

Plan participants will have to become smarter. With greater control over their accounts, participants will be bombarded by even more offers to move their accounts somewhere else, chasing the better deal. With all that pension money in motion, participants simply have to be sure they are making the right choices with their money.

New Opportunities and Abuses Unrestricted portability opens the door for the creative. The downside to the new rules is the opportunity for abuse. Let’s see how that works.

IRAs are a tempting source of money. Many people want to tap into their rollover IRAs for extra spending money, bankrolling their new businesses, or making private investments. In the last ten years I have had hundreds of discussions with former executives who wanted to use their large IRA rollovers as seed money for their new ventures. I have always discouraged that, since the IRA rules are so restrictive.

IRAs are not ATM machines. Loans from IRAs are not permitted. IRAs cannot hold life insurance. Investing in private companies is almost impossible because IRAs require institutional custodians. Bank, mutual fund, or brokerage firm IRA custodians are not interested in holding a second mortgage on your neighbor’s house, no matter how good a deal it is.

Here’s where the new portability rules come in. Unlike IRAs, qualified plans can permit participant loans up to $50,000, investments in private companies and private mortgages, and life insurance on participants. Since IRAs can now be rolled over into qualified plans, even if the IRA is not a conduit IRA, there is a new incentive to transfer IRAs to plans to take advantage of their investment flexibility.

Want to invest your IRA in a hot start up? Need a quick $50,000 loan from your IRA? Want to loan your golfing buddy $200,000 from your IRA secured by a mortgage on his new vacation home? Need some extra life insurance using IRA funds? Want to make your IRA an ATM machine?

Here’s what you’ll have to do. You need a qualified plan, but a plan must be established by an "employer." You must find, or create, the "employer" that sponsors a plan that suits your needs. You will most likely have to establish yourself, or an entity you form, as an "employer" to which you will append the plan. Then, your controlled "employer" adopts the plan, the IRA is rolled over to the plan, and away you go. Take those loans. Make those mortgages. Invest in those start-ups. Get more life insurance.

This procedure, needless to say, is risky and not for everyone. Taken to the extreme it can be abusive. However, if the circumstances are right, this method can work.

The largest problem is creating a bona-fide employer. There must be a non-tax legitimate business purpose for the employer to exist. Maintaining a qualified plan is not alone a sufficient business purpose. The employer must have revenue and actually do things. It cannot be a passive pocket book.

Then, the selection and design of the plan is critical. Profit sharing and money purchase plans each have quirks and special rules. The plan can be based on a prototype document, but its features must be hand crafted.

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