Rule Your Rollover

The world of retirement has changed, and that means more responsibility for workers. The trade-off also means more choice and more control for investors.

One choice available to anyone who contributed to a 401(k) plan at work allows those employees to take their accounts with them when they leave their jobs. That money can be moved directly into a special IRA, known as a rollover IRA, preserving all the benefits of the original 401(k). A portable account can be a great thing for mobile workers.

The NYSE's enforcement unit, however, has been hearing some complaints that indicate all's not well in the land of rollover IRAs. Brokerage customers have been complaining that they've suffered big losses when transferring their money that had been subsequently invested in high-risk stocks and mutual funds.

This is a problem because, as NYSE Regulation noted in a memo urging brokers to keep a closer eye on these accounts, an investor's rollover IRA can contain most of that investor's retirement assets and, sometimes, their entire net worth. Depending on their age, people may not have time to recover losses before reaching retirement and needing the money.

All this caused NYSE Regulation to remind brokers of the "know your customer" rule. In other words, brokers are supposed to invest a customer's money according to their goals and risk tolerance. Well, who knows the customer better than ... the customer? That's you.

You can avoid this potentially terrible fate by taking control of your rollover IRA yourself. The Motley Fool is no fan of high-priced brokers, who charge you high fees to invest your money using strategies that very rarely beat the market's average growth. Investors can often outperform them by simply investing in a market index mutual fund, which captures the average returns.

Rollover IRAs are a fabulous invention. They let you take your retirement savings with you when you leave an old job. If you've left several old jobs, you can amass all your retirement funds in one place. You still get all the tax-deferred advantages that came with the original 401(k) accounts.

When you transfer your 401(k) funds by rolling them into an IRA (and thus the name, rollover IRA), you can also avoid the potentially expensive consequences of getting your hands on your retirement money too early. The IRS can levy income taxes and penalties if you withdraw that money too soon, and it's considered a withdrawal if you cash out a 401(k) after leaving a job. Besides, you set back your retirement goals, and there's probably no good reason for that.

Once your money's in a rollover IRA, you're also not bound by the few investment choices provided by your employer. You've got the entire world available as your investing oyster, or at least the vast universe of stocks, mutual funds and other investments available through your broker.

You can invest in virtually everything with just one mutual fund, such as Fidelity's Spartan Total Market Index Fund. Among its top holdings, you'll have a stake in Microsoft (Nasdaq: MSFT  ) , Pfizer (NYSE: PFE  ) , and Bank of America (NYSE: BAC  ) . You can also spread your holdings across the world with funds like the Dodge & Cox International Stock Fund (FUND: DODFX  ) (a recommendation of our Motley Fool Champion Funds newsletter), which invests in things as diverse as the Central Japan Railway and Avon Products (NYSE: AVP  ) .

Or, you can buy individual stocks that suit your fancy. Or, you can invest in bond funds and cash instruments. The important thing is that you can control the amount of risk you want to take with money you've spent a lifetime saving. After all, you want to make your customer happy!

Related Foolishness:

Spend some time in our IRA Center to find answers to all your IRA questions, as well as resources to help you open an IRA account.

Microsoft and Pfizer are Inside Value picks. Bank of America is an Income Investor selection. Whether you're into deep values or dividend superstars, the Fool has a newsletter for you. And you're just a few clicks away from afree 30-day trialto any of them.

Fool contributorMary Dalrympledoes not own shares of any stock mentioned in this article, and she welcomes your feedback.

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