I often get the question of what to do with an old 401(k) or 403(b) sitting with a former employer. In short, there are only a few circumstances where you would want to leave it be, but in those circumstances it can be extremely advantageous to do so.
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So, when should you leave the money in an old 401(k) or 403(b) rather than roll it over to an IRA?

• When you’ve left the employer at ages 55- 59 ½
  • In this instance, you can withdraw money without penalty and without having to wait until 59 ½
• When you have appreciated employer stock
  • This is not a common scenario so I’ll save you some headache and not delve into net unrealized appreciation
• When your former employer actually offers a decent plan
  • You may THINK your plan is amazing, odds are it’s not
  • Most plans don’t offer a fund menu that can be molded into a truly diversified portfolio
• Better protection from personal law suits
  • Generally, your assets are safer in a 401(k) or 403(b) plan in this scenario
• If your plan allows for employee loans and you need to access the money you can do so in a 401(k) or 403(b) without penalty

 
Other than these scenarios, I recommend rolling over your nest egg to an IRA with a reputable fiduciary. Just some of the reasons are:

• Flexibility
• Access to a wider range of investment options, not just the 10-15 offered in your employer plan
• Ability to construct a truly diversified portfolio based on your risk tolerance and return needs
• Lower fees
  • Some argue that you can get lower fees in a big 401(k) program, but in my experience many plans are more expensive than you may realize when all expenses are considered. Not just mutual funds expenses, but third party administrator fees, third party transfer fees, and other expenses that are embedded in the plan.
• Professionally managed and re-balanced
  • Most employees must choose their own funds haphazardly and do not re-balance their portfolios consistently

Sixty five million Americans now invest for retirement through 401(k)s and similar plans. Defined contribution plans have become the centerpiece of many American’s retirement savings. How can you determine if your plan makes the grade? Here are some of the components to look at when judging your company’s 401k.

Fees

Low fees and expenses are important to getting the most benefit from your 401k.Unfortunately it is often hard to determine how much you are paying in investment, administrative, legal, record keeping, and accounting expenses. Now the various fees are not secrets, but are typically hidden in the fine print of multiple documents available in multiple places, so it's very hard for individual investors to figure out what has been subtracted from their individual accounts.

Fortunately, under a proposed Labor Department regulation, scheduled to go into effect January 1 of 2009, your employer may be required to tell you these fees, and disclose in dollar terms each quarter how much you are being charges for these various fees.

What levels of expenses are appropriate for your plan? It depends on the size of your plan.But for all but the smallest plans (plans with less than $500,000 in total assets) total expenses of 1% to 1.5% is reasonable. The total expenses include investment management, record keeping and accounting, legal, and administrative expenses.

If your plan charges more you should question those in charge of the plan. The company sponsoring the plan has a fiduciary duty to plan participants and they may be just as much in the dark as you about the fees being charged.

Matching

Matching is a key feature of 401(k)s participation rates increase when an employer matches a participant's contribution in one form or another. Most large employers realize that and many small companies have matching programs under the ‘safe harbor’ rules, that allow highly compensated employees and business owners to maximize their 401k deferrals.

No restrictions on sales of employer stock

In the wake of such high profile corporate bankruptcies such as Enron and more recently Bear Stearns the importance of not having too much of your retirement money invested in employer stock is evident. The best plans, at least of those that use employer stock funds, have no barriers to immediate diversification.

Automatic Enrollment

The best 401(k) plans automatically enroll workers into qualified default investment option and automatically increase their contributions over time. With auto enrollment more employees end up saving for retirement, and they start saving earlier, making their chance of reaching their retirement goals higher.

Investment Options

The best plans offer enough investment options to allow you to build a well diversified portfolio. They often include large cap, mid cap, small cap, and international stock funds, as well as bond funds and money market or guaranteed income options. Many of the best plans now offer target date or risk based portfolios to simplify your selections. The best plans also offer automatic rebalancing of your investments at regular intervals.

Education

Employee communications and education is an important piece of keeping you informed of the changes that could affect your retirement plans. The best plans offer ongoing investment education and financial planning information.

Pricing

Some of the best 401(k) plans tend to invest in funds that have what's called institutional pricing. Most mutual funds come in many classes, with some classes having higher fees than others. Plans that use funds with institutional pricing typically have the lowest fees, but in any event your plan should be using the share class with the lowest expenses available to the plan based on the plan size.