"I have several 401(k)s from previous jobs. Should I leave them
alone or roll them into an IRA?"
A recent investigation by the Government Accountability Office
found that departing employees who sought advice from the financial
services firms that managed their 401(k)s were often pressured to
roll their money into the firm's IRA. That's not always the best
Let it ride. With millions of dollars to invest, large 401(k)
plans have access to institutional-class funds that typically
charge lower fees than retail funds. That means you might pay
higher fees in an IRA, even if it's with the same company that
manages your 401(k) and you have access to many of the same funds.
A new federal disclosure rule for 401(k) plans should make it
easier to figure out how much you're paying in administrative,
investment and transaction fees (see
Decoding Your 401(k) Fees
Fund selection is another advantage of a 401(k). The 15 or so
stock, bond and target-date funds in a typical 401(k) plan have
been picked by professionals who have a fiduciary obligation to
employees, says Rick Meigs, president of 401khelpcenter.com. When
you roll over your money to an IRA, you have thousands of funds to
choose from, but that's an advantage only if you have the time and
inclination to search through them.
In many 401(k) plans, one of the options will be a stable-value
fund. With recent average yields of 1.96%, these low-risk funds
provide an attractive alternative to money market funds, and unlike
bond funds, they won't get creamed if interest rates rise. In
recent years, 401(k) assets in stable-value funds have soared. The
funds are available only through employee retirement plans, says
Alison Borland, vice-president of retirement solutions and
strategies at Aon Hewitt.
Finally, if you need income after a layoff or early retirement,
401(k) plans offer more flexibility. If you leave your job or
retire in the year you turn 55 or older, you can withdraw money
from your 401(k) without triggering a 10% early-withdrawal penalty.
(You'll still have to pay taxes, though.) If you roll the money
into an IRA, you'll have to wait until you're 59 1/2 to take
Reasons to roll it over. Sales pitches aside, if your former
employer's 401(k) plan is riddled with lousy funds and high fees,
moving your money to a low-cost IRA is a wise move. You may also
want to roll it over if you're older than 59 1/2 and ready to take
withdrawals. When it comes time to tap your savings for retirement,
an IRA provider will allow you to take withdrawals whenever you
want. Many 401(k) plans don't offer that kind of flexibility.
Orphaned 401(k) plans collected from past employers could make
it difficult to determine whether your overall portfolio is
appropriately diversified. Worse, you risk losing track of some of
your savings. Meigs says he routinely hears from people who can't
locate their 401(k) plans because their former employer filed for
bankruptcy, changed its name or sold off the division they worked
One way around that problem is to roll your 401(k) accounts into
your new employer's 401(k). Most large employers allow plan-to-plan
rollovers, "but it's not as easy as it should be," Borland says.
You may have to hound your former employer to fill out verification
forms required by your new 401(k) plan.