Forgotten 401(k)s

Have you got a few old retirement plans rattling around? Join the crowd. According to the Department of Labor, Americans move to a new employer once every four years, leaving a trail of old 401(k) and 403(b) plans that total in the trillions of dollars. Studies show that by 2006, consumers will take the management of more than $2 trillion into their own hands. They'll funnel it into individual retirement accounts (IRAs), completing the process that the financial services industry has dubbed the "rollover."

If you have money sitting in a former employer's retirement plan, consider taking control of that dough. Doing so gives you more investment options at a lower cost.

Three-step takeover
Taking control of your retirement money is pretty simple. For the best results, do things in the following order:

1. Pick somewhere to "roll" your money into: We're talking about opening an IRA, which you can easily do through a discount broker. In general, you want to make sure the bulk of your contribution is going toward your retirement nest egg, not to the broker. You can get into the nitty-gritty of what each discount brokerage firm offers, including customer service and one-time freebies. Or you can take a shortcut and hone in on two particular things: Fees and trading commissions.

By law, your broker can charge an annual fee to maintain your IRA (aptly named "IRA maintenance fee"), but many don't. Then there are fees for account inactivity and transferring your money out of the account. Trading commissions can also erode your returns. (I checked out what our sponsor brokers had to offer with this side-by-side comparison. You'll see that Ameritrade (Nasdaq: AMTD  ) charges neither an IRA maintenance fee nor a minimum amount needed to open an account. It charges $10.99 a trade. At Brown|Co, there's a $5,000 minimum required to open an account, but qualified trades are just $5.

Think about how you're going to use the account (dollar-cost averaging? Perhaps ShareBuilder's the way to go, for example), and then choose the broker that's the best fit fee-wise.

2. Take control of the dough: Once you've opened an account, there are two ways to take the money with you: via "rollover" or direct transfer. Both are easy to execute (here's a more detailed description of the process), but the direct transfer method helps you clearly avoid any costly tax snafus.

Your old employer's human resources person can put you in contact with the 401(k) plan custodian. Simply tell him or her what you want to do, and follow the instructions provided to you. It may make you queasy to suddenly find yourself in control of tens of thousands of dollars, but keep cool. Be sure that any check issued by the plan is not made out in a way that allows you to cash it. As long as it isn't, you will have no problems with income taxes.

3. Prioritize your accounts: Roth or regular? The company 401(k) or a taxable brokerage account? Here's a general investing pecking order when you've got several kinds of options for investing.

When to stay put
We nearly always advocate taking your 401(k) money with you when you leave a job. But there are times when it makes sense to leave the money with your former employer. Consider doing so if:

  • You are satisfied with the investment choices you have in that plan.
  • Your investment costs are lower than you can get elsewhere.
  • Your financial situation is such that you need the bankruptcy protection provided by qualified retirement plans.
  • Your plan allows former employees to borrow against their 401(k) accounts, and you think you will want to do so in the future.

Most employer-sponsored retirement plans will force you to move your money (via rollover or direct transfer) if you have less than $5,000 in your account. If you have $5,000 or more, though, you may leave the money in your 401(k) until the normal retirement age specified by that plan.

Regardless of whether you stay or go, don't stop investing in your current employer's retirement plan, especially if there's some sort of matching program. And while it may be tempting to cash that check and throw a "new job bash" like no other, don't do it. You'll pay a pretty penny to Uncle Sam in early withdrawal taxes and shortchange your future self.

It's so simple to open a self-directed IRA. Do it before the temptation sets in.

Dayana Yochim owns several of the financial products mentioned in this article but no shares in any of the big brokerages mentioned. The Fool'sdisclosure policyhas no hidden fees.


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