By Jane Bryant Quinn
E-Trade, the online brokerage firm, is running some pretty aggressive ads to attract accounts. Theyre aimed directly at the tens of thousands of people who are currently leaving their jobs.
Some workers have quit voluntarily, to do something else. Thousands more have been laid off.
E-Trade is interested in what you do with your 401(k) when you leave your job. You have three options:
1. Take the cash from your 401(k) and spend it. But please dont. Youd owe taxes and probably a 10 percent penalty on the money. Even worse, youd be throwing away all those future years of tax-deferred growth.
2. Leave the money in your ex-companys plan. For this, you need more than $5,000 in vested benefits in the account.
3. Roll your 401(k) into an Individual Retirement Account. The IRA could be at a bank, mutual fund or brokerage firm. You can manage the money yourself or hire a planner to manage it for you.
E-Trade wants you to switch to its own rollover IRA. To that end, its advertisements play on what it assumes are your bitter feelings about your former company. It portrays your old colleagues as lazy, stupid, backbiting, insincere and unhappy in their work.
The message is, "Get your money out of the hands of those dummies! Bring it to us."
But dont let your decision be driven by your ire. After all, your colleagues (good and bad) arent running your 401(k) account. Its invested in mutual funds run by independent managers and perhaps in the companys own stock.
There are pros and cons to leaving the money in your ex-companys 401(k). First, the advantages:
The plan is generally a safe haven for people who dont know much about investing. Companies offer a prudent mix of diversified mutual funds, invested in stocks and bonds.
At large companies, the price of managing money is low. An independent IRA might cost you more in fees and investment expenses. The more you pay, the less money accumulates in your account.
Here are the disadvantages of leaving your money in your former companys 401(k):
Your account might contain a lot of company stock that youre not allowed to switch into mutual funds. Thats a risky position. With an IRA, you could diversify.
If the company is small, your 401(k) might be administered by a stockbroker or insurance firm. Your costs might be high-maybe 1 percent to 2 percent.
The fees come directly out of the plan, so you might not realize how much you pay, Stephen Butler of Pension Dynamics in Lafayette, Calif., told my associate, Dori Perrucci. Youd raise your returns by shifting to an IRA at a low-cost mutual-fund group, such as Vanguard in Valley Forge, Pa.
(On the other hand, you might pay more if you switch to an IRA and hire an adviser who puts you into high-cost funds.)
There might be restrictions on when and how you can take money out of the 401(k). For example, you might have to take a taxable lump sum if you want distributions before age 59?, says Ted Benna of the 401(k) Association in Bellefonte, Pa. An IRA would be a better choice.
Your company might be taken over, complicating the 401(k).
IRAs are definitely better for people who dont expect to use all the retirement money theyve built up-especially if youll leave the money to someone other than your spouse (for example, your children).
If a spouse inherits a 401(k), he or she can roll it into an IRA and make lifelong withdrawals. Slow withdrawals allow more money to stay in the plan and grow.
But when children or other beneficiaries inherit a 401(k), they normally have to withdraw the money over a maximum of five years.
Write Jane Bryant Quinn, Washington Post Writers Group, 1150 15th St. NW, Washington, DC 20071.
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