SmartMoney Monday: What to do with a previous 401k

HONOLULU (HawaiiNewsNow) -
We're still taking your questions on things you can do to help meet your 2015 financial goals. Today Bank of Hawaii's Chris Otto, Financial Planning Manager of Bankoh Investment Services, Inc, the non-banking investment subsidiary of Bank of Hawaii will help us answer an investment question from Flor.

Flor says, "I have $87,000 in my old employer's 401K invested in money market. I expect to retire in 10 years. Any suggestion on where I can invest with minimal risk of losing money?"

It's difficult to answer without knowing more about her 401k plan's specific investment options. Now, with that said, the good news is that all 401k plans are required to provide participants with a widely diversified lineup of investment options. These options will range across the risk spectrum from Conservative to Aggressive. Flor should consult with her plan's investment advisor to determine which option is most suitable for her, based on her own risk tolerance, time horizon and retirement goals. Also, Flor did mention that she no longer works for that company. I want to remind her that she does have the option of rolling over her 401k balance to an IRA if she doesn't feel comfortable with the available options in her old plan. Generally, Rollover IRA accounts have a lot more flexibility when it comes to investment options. It would be best for her to consult with a financial advisor to explore that avenue.

Should employees who no longer work for a company keep their balances in their old 401k plan?  Or, should they immediately roll it over to an IRA, or simply just cash it out?

Legally, an old employer can't force an employee to rollover their balances to an IRA or take a distribution if they have a balance greater than $5,000. Now, if someone happens to have less than $5,000, and they don't indicate what should be done with their money when they leave, their old employer can transfer their account balance to an IRA of the plan's choosing. And, if someone has under $1,000 in their account, the plan actually allows the employer to simply send them a check, which could trigger taxes and penalties.

In Flor's case, she can technically leave her assets in the plan, if she likes the plan's investment options. Or, she can roll it over to an IRA, possibly even to her new employer's plan, assuming they allow rollovers. She can also take a distribution, though distributions are subject to taxes and possible penalties if you're under the age of 59 ½. Ultimately, the decision boils down to what's right for each person and their individual circumstances. I recommend people seek a financial advisor to help them understand the pros and cons of each investment strategy. Fees, investment options, withdrawal flexibility and taxes will all play a role in the analysis, so that decision shouldn't be taken lightly.

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