What to do
with your 401(k)
when you leave
your job

Enrolling in an employer’s 401(k) plan is often one of the wisest ways to start saving for retirement. 401(k) plans offer a pre-selected array of funds chosen by a professional plan administrator, letting you create a base layer of investments for retirement that many employers match with additional funds. But what should you do with that money when you change jobs? Is it best to take it with you, or should you leave past 401(k) savings under your former employer’s care? Here’s a look at how to approach the decision.

Are you detail-oriented?

Practically speaking, some experts think it’s best to take your former workplace 401(k) funds with you if possible—mainly because doing so can make your funds easier to track. If you leave your funds behind, you’ll need to keep your former 401(k) plan’s administration up-to-date each time you move—or else you risk missing mailings, statements and important information about your funds, says Rick Meigs president of 401(k)helpcenter.com, a Portland, Oregon-based 401(k) portal. “Employees can be terrible about keeping their former employers up to date,” he says. “That can create a huge detective job down the line.” In addition, with more than one 401(k) plan, it’s more difficult to keep track of your holdings and whether they represent the mix of investments that make sense for you.

What does your new employer allow?

Does your new employer even offer a 401(k)? Chances are the answer is yes. Roughly three-fourths of all non-government employers offer retirement benefits in some form, according to data from the Bureau of Labor Statistics. If your new employer offers a 401(k), you’ll need to find out if the company will allow a rollover from a prior employer’s 401(k). Most employers do permit rollovers, says Meigs. If you can’t do a rollover, you can leave your funds where they are in the former 401(k), or you can move them into an IRA.

Should you move your money into an IRA or your new employer’s 401(k)?

Both an IRA and 401(k) let you grow your money tax-deferred for retirement. But a 401(k) plan’s “menu” of investment options is typically smaller, confined to a selection of funds chosen by a professional. If you choose to put money in an IRA, you’ll have a wider variety of investing options—including stocks as well as mutual funds—and will need to take a more involved role (or hire your own help) in choosing where to invest.

If you choose to keep money in a 401(k), you have fewer decisions to make since the number of funds available is often smaller. Another key consideration: Most 401(k) plans will match funds, essentially giving you free money to invest. The exact match and qualifications vary by employer, so find out the rules at your new workplace. But generally speaking, matching means you can set aside more money in a 401(k) than in an IRA. For instance, if your employer matches your investment with $1 for every $4 you put into a 401(k), your $4,000 invested becomes $5,000; in an IRA, that $4,000 is $4,000.

If comparing old and new 401(k), who’s got the better fund options?

If you want to compare your former and new employer’s 401(k) plans, you can use tools from BrightScope (www.brightscope.com) to see which is performing better. Brightscope compares plans within industry “peer groups” so you can see how your employer’s plan performs relative to a plan from a competitor or same-category employer for whom you might work. It also outlines top holdings in the plan and provides online data filed by the plan administrator. Not all 401(k) plans will appear in Brightscope’s data, which is compiled from public documents that employers of more than 100 workers must file, but a large universe is available.

Aside from looking at overall plan ratings, you can take a look at the types of investment options available under each umbrella. Financial advisors and Meigs typically recommend that investors assign some of their retirement money to target date funds (which are actively managed funds that shift assets from high-performing, risky assets in early years of a career to moderately performing, less risky assets as the retirement “target date” nears) and to an index or “balanced” fund which includes a representative mix of assets of all types (multiple company sizes, sectors and domestic as well as global holdings).

If your 401(k) or IRA option offers these holdings but from different fund brands, you can compare fund performance in each category to help you make your decision, using filings from the fund companies or tools like Morningstar. For instance, if one 401(k) offers a target-date fund from Company X and another 401(k) offers a target-date fund from Company Y, compare how well X’s and Y’s target-date funds have performed and what they contain. Consider using those criteria to help you decide whether you house retirement money in one 401(k) versus another. In addition to fund returns, you’ll want to look at fund administration costs, which can eat away at future returns.

Bottom line: If you’ve got an employer offering a 401(k), you’re fortunate. But to maximize returns, you need to look at 401(k) investment menus, employer matching policies and just how well 401(k) funds are performing to make the best choice.

Jane Hodges (www.janehodges.net) is a freelance writer in Seattle, Washington.