Leave 401(k) or roll it over?

Retirement » Basics »

If you're like most Americans, you change employers about as often as you change hairstyles.

Indeed, a 2012 report by the U.S. Labor Department notes that the average worker holds 11 jobs from age 18 to 46.

All that job-hopping may help broaden skill sets, but it also creates a dilemma for those who are unsure what to do with the 401(k) dollars they accrue.

Generally, you have four options when you leave your job:

Four 401(k) options after leaving a job

  • Roll over the funds into an individual retirement account.
  • Leave your 401(k) behind.
  • Transfer the money to your new employer's plan.
  • Take the money and run.

That last option really isn't a good choice, lest you sentence yourself to a lifetime of professional servitude. Nonetheless, many people take that route. According to a 2012 report by Transamerica Center for Retirement Studies, 25 percent of unemployed or underemployed workers cashed out their 401(k) plan.

Others used a wiser approach. According to the same report, 22 percent of people who left a job kept their 401(k) money where it was, and 20 percent rolled their accounts into an IRA.

Leaving money in an old 401(k)

Many retirement savers, especially those who are happy with the performance of their 401(k) plans, opt to leave the account balance with their former employer, at least for a while.

Despite the advice of some experts who favor the flexibility of an IRA, Pam Hess, an investment manager and former director of retirement research at Aon Hewitt, says many employees are better off leaving their money in a defined contribution plan -- either their former 401(k) or their new one.

"Generally, the benefits of leaving your retirement money within a defined contribution plan are superior to rolling them over to an IRA," she says. "You have the purchasing power of the entire plan behind you rather than being out there on your own."

401(k) rules

  • If your account holds less than $1,000, your employer is allowed to automatically cash out your account when you leave.
  • If your account holds between $1,000 and $5,000, most employers will automatically roll your 401(k) into an IRA when you leave your job.
  • If your account holds more than $5,000, you must decide whether to leave your money behind or take it with you.

Indeed, mutual funds affiliated with 401(k) plans typically waive load fees for plan participants and transaction costs for 401(k) investors can be lower. Meanwhile, IRAs frequently charge an annual (though nominal) maintenance fee.


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