Q: I left my job, and I'm looking for a new one. Am I better off rolling over my old 401(k) to a new employer's 401(k) or to an IRA? I am being sold hard on the latter option by the firm in charge of our life insurance. — Dawn Deschamp, Lakewood, CO
A: You're probably better off rolling into an IRA. But steer clear of investments pitched by your employer's insurance company.
First, a quick recap of your options. When you leave your job, you can keep your 401(k) at your old employer, as long as the balance is $5,000 or more. (If your balance is smaller, employers are allowed to return the money to you.)
You can also roll over your balance into an IRA, which is often the best choice (and it's what you should do if you have a small-balance account that is being returned to you). "With an IRA, you will have a wide array of choices, and you can often choose funds that charge lower fees than a 401(k)," says financial adviser Allan Roth of Wealth Logic in Colorado Springs.
Make sure you to set up your rollover as a trustee-to-trustee transfer, which moves your 401(k) balance directly to the IRA provider. Don't let your employer write you a check, or 20% of your balance will be withheld until tax time.
Another option, when you get a new job, is to move your 401(k) account into your new employer's 401(k). (Not all plans permit this.) Doing so may make sense if the new plan offers good, low-cost investment options, since with a single portfolio, you can more easily track your asset mix and rebalance.
(Of course, the final option is to simply cash out your account, but that would be such as bad decision, we won't go into it—except to point out that you would trigger taxes plus a 10% penalty for early withdrawal if you're under age 59 1/2.)
The best way to choose among these options is to compare the investments you want to own and the fees you would pay. At brokerages, such as Schwab and Fidelity, you can invest in low-cost ETFs and index funds, often with expense ratios of 0.10% or less. Some large-company 401(k) plans, with their negotiating power, can match those low fees, but many cannot. If your 401(k) charges more than, say, 0.8% for a stock fund, you probably should look elsewhere.
High fees are a key reason to avoid investing your IRA with your former employer's insurance company. Funds offered by insurers often charge sales loads or carry high expenses. And insurance products, such as variable annuities, are typically complicated and costly. "Insurance and investing are best kept separate," says Roth.