What to Do With Old 401(k)s

"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 move.

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.

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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 penalty-free withdrawals.

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 for.

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.

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