A 401k plan is an employer sponsored retirement savings account offered to eligible employees. Employees make elective salary reductions that grow tax-deferred in the plan. When an employee's position is terminated, for whatever reason, he is given the option to rollover the 401k plan into another qualified plan. The "best" plan to roll the money into is a matter of personal investment objectives and comfort levels.
Someone retiring, or close to it, should seek more conservative investment options to preserve the principal saved over decades. Banks offer rollover IRA custodial services with conservative investment options. A bank IRA may have liquid savings, money market accounts or slightly higher interest-bearing certificates of deposit (CDs). Banks are the best option for an investor concerned with seeing investment dollars fluctuate. A bank IRA has Federal Deposit Insurance Corporation (FDIC) insurance coverage up to $250,000. Should the bank fail, the IRA is protected by the federal government.
Brokerage firms offer diverse investment options for a 401k rollover. A brokerage firm offers stocks, bonds and mutual fund investments. An investor can choose similar investments that were held in the 401k plan or look into more diverse investment options. A brokerage firm rollover IRA is the best choice for an investor seeking to have assets continue to grow or simply wanting to keep options open. Even brokerage firm accounts have conservative investments to meet the objectives of all investors, although there is no insurance coverage on the securities.
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Other Custodial Options
The IRS allows other types of investments beyond savings and securities. Specialized self-directed IRA custodians such as CPA firms offer real estate investments, precious metal investments or even business owner retirement savings accounts. These rollover IRAs have higher regulations and are, therefore, more expensive than bank or brokerage IRA accounts. In spite of the expense, these IRAs are suitable for investors who want to diversify into other investment categories or have more experience in alternative investments.
There is an alternative option available to 401k investors, which is to leave the money where it is in the employer 401k plan. This isn't leaving the money with the employer, but instead leaving it in the investments held with the plan administrator. If you are satisfied with the investment performance, there may be no reason to rollover into another plan. Assets in a 401k plan generally have lower fees, a benefit of having many employees' assets covering the costs of administration. If you choose to leave the assets, you are entitled to roll them over at any future date.