When Elliot Levine changed jobs six years ago, he had to figure out what to do with the $10,000 he had accumulated in his 401(k).
Rolling it into an individual retirement account made the most sense for the Oceanside, N.J., resident because he didn't want to be limited to the handful of mutual funds in either his former or his new employer's plan. In an IRA, he could put the money wherever he chose.
"I wanted to get control of it," said Levine, 37, a marketing executive who invests most of his IRA in individual stocks. The 401(k) "just wasn't keeping pace with the market. I'm in my 30s. ... Now is the time to take risks."
Deciding what to do with your 401(k) when you change jobs is often an afterthought, especially for younger workers who haven't accumulated big balances. But you should have a plan for that retirement money, especially because a growing number of workers will depend heavily on 401(k)s in retirements.
The worst thing you can do, experts say, is to take the money out of the account and not reinvest it in another tax-qualified retirement plan, because you could be subject to hefty taxes and fees. Also, you would lose the opportunity to have that money grow over the decades until you retire.
Other options include transferring it to your new employer's 401(k) or leaving it in your former company's plan.
In some cases, your company may make the decision for you if you don't specify what you want to do. If you have $1,000 or less in the account, your employer may send you a check for the balance. Until two years ago, that number was $5,000, but the federal government lowered the threshold to make it less likely people would cash out.
Today, if you have between $1,000 and $5,000 in your 401(k) when you leave a job, your employer can't send you an easy-to-cash check unless you specifically ask for the funds. Instead, it can either keep the money in the company plan or set up an IRA for you and roll the funds into it.
Your employer can pick the financial institution that holds the account, but the money must be placed in fairly conservative funds that are designed to preserve principal and charge reasonable fees.
If you have more than $5,000 in the account, you can leave it with your former employer.
Unfortunately, experts say, most people take the money and run. Some 45 percent of 401(k) participants elected to take a cash distribution when they left their jobs, according to a 2005 study by Hewitt Associates, a consulting firm. Some 32 percent kept the savings in their former employer's plan, and 23 percent rolled it into an IRA or another retirement plan.
Many workers don't think rolling over a relatively small amount of money into a new plan is worth it. Some 86 percent of those with $5,000 or less took the cash, Hewitt statistics show.
"They think a couple of thousand dollars won't make or break their retirement," said Pam Hess, Hewitt's director of retirement research. "But, in reality, it can be significant."
Saving $5,000 in your 401(k) at age 25 can turn into $75,000 at retirement, she said. Those who start saving at that age have 40 percent more when they enter their golden years than those who begin at age 35, because the money has more time to grow if you start saving early.
"The power of compounding for younger people is so powerful," Hess said.
Deciding what to do with your funds depends in part on whether you like the options in either your former employer's or new employer's plan, and how much control you want over your investments.
Keeping it in a 401(k), either your former or future employer's plan, has its benefits. It can be cheaper than investing in an IRA because the funds held in corporate retirement plans are "institutional class," with lower fees than retail "investor class" funds, said Ellen Rinaldi, a principal at Vanguard's investment counseling and research group. And the maintenance fees may be lower than those in an IRA. Call your plan administrator to find out the fees. Finally, a 401(k) may provide access to mutual funds that are closed to new investors.
The main benefit of an IRA, on the other hand, is that you can choose from myriad stocks, mutual funds, bonds and other investments, said Alfred Osbourne, senior financial adviser at Ameriprise Financial. For those who want to take control of their investing or those who use financial advisers, an IRA can be a better choice.
The fewer retirement accounts you have, the easier it is to manage. So if you've had a number of jobs, you may want to consolidate your 401(k)'s into one IRA or your current employer's plan.
If you do move your 401(k) into an IRA or another 401(k) plan, make sure you do a direct rollover. Don't have your company write a check to you: If you don't deposit it into another qualified retirement plan within 60 days, it will be considered a distribution, the funds subject to income taxes and, if you are younger than 59 1/2 , a 10 percent penalty. Your company is required to withhold 20 percent of the balance for taxes.