When leaving a company, whether because of retirement, a layoff, or pursuing a new job opportunity, you are faced with many financial decisions. Among those are what to do with the retirement assets you accumulated during your employment. You basically have two important decisions to make.
1) Should you roll your 401(k), 403(b) or other retirement plan balances into a rollover IRA?
2) Should you take a lump sum payment or an annuity from your pension?
The first one is easy: the answer in nearly all cases is YES. When you roll your 401(k) or another plan into an IRA, even if you keep it invested in the exact same funds, you avoid administrative fees associated with the company plan. These fees can be as high as 1%. Over a long period of time, these fees really add up. By rolling your money out, you make sure you avoid these fees altogether.
Another reason you should roll your retirement plan into an IRA is that you greatly improve your investment choices. Most plans have only a few mutual funds to choose from and often these do not represent enough asset classes to give you proper diversification. You may also be excluded from using individual stocks. By rolling into an IRA at a discount brokerage firm like TD Waterhouse or Charles Schwab, you have nearly the entire universe of mutual funds to choose from. In addition, if your account is large enough (generally over $200,000), you may benefit from using individual securities instead of funds. (To learn more about the benefits of using individual stocks, see the article "The High Cost of Mutual Funds" in this newsletter and the article "The Case Against Mutual Funds".)
The second decision is more complicated. Whether to take a lump sum payment or an annuity from your pension depends on a number of factors. Some of the things you will need to consider include:
