Question: I am changing jobs after 12 years. What information do I need from my new employer in order to roll over my 401(k)? Is there a form I can get for myself without having it supplied from my previous employer?

TB: The first thing you need to do is to find out whether your new employer permits money to be rolled over into its 401(k) plan. Most employers permit rollovers, but they are not required to do so. Next, you need to find out when you will be permitted to roll the money over. Most employers permit rollovers only after newly hired employees are eligible to enter the plan. For example, if your employer requires six months of employment before you can contribute to the plan, you may have to wait until then to transfer the money. Some employers permit newly hired employees to roll money over from a prior plan immediately, even if they are not eligible to begin contributing to the plan.

When you are eligible to roll the money over into the plan, your employer will have to tell you exactly what you have to do because the procedures vary somewhat from plan to plan. You will probably be required to complete a rollover form. This form typically includes an investment selection in which you specify how you want to invest the money that is rolled over. You will also have to provide written instructions to your prior employer. Your current employer should tell you where the check from your prior plan should be sent and to whom the check should be payable. For example, your new employer may want your prior employer to issue the check payable to the trustee of the new plan.

You will have to leave the money in the prior plan or transfer it to an IRA rollover account if you are not permitted to transfer the money to the new plan immediately. Your old employer cannot force you to take the money out of the plan if the amount you will receive is more than $5,000. You may have to transfer the money into an IRA rollover if your benefit is less than $5,000 and your former employer requires you to withdraw the money before you are eligible to transfer it to the new plan. You must put the money into an IRA that does not hold any regular IRA contributions; otherwise, you will not be permitted to transfer the money into the new 401(k) plan when you are eligible to do so.

Question: I'm a CFP in Sydney, Australia. I have a new client who is moving to Australia permanently early in 2001 and has about $200,000 in a 401(k). Are there rules for accessing the money before age 59ý if you leave the United States permanently? What is the tax or exit penalty? My client wants to seek withdrawal and place capital in an Australian retirement plan.

TB: Your client will have to pay tax on this money before it can be transferred out of the United States. It probably will be in the best interest of your client to move the money out of the United States in a manner than minimizes the tax bite. This probably should be done over a period of years when your client has little or no other taxable income in the United States.

Money withdrawn from a 401(k) is taxable as income and there is an additional 10 percent penalty tax for early withdrawals. The 10 percent early withdrawal penalty tax is not applicable if your client is over age 55 when he or she leaves the company sponsoring the plan, or if the benefits are received from the plan or a rollover IRA over a period of years in a manner which qualifies as an Internal Revenue Code 72(t) distribution. The distribution should obviously be structured to avoid the 10 percent penalty tax. In addition, the distribution should be spread over a number of years to take advantage of the lowest possible tax rate.

Many 401(k) plans permit only lump-sum distributions. Your client should check with the person at his or her employer who oversees the plan to see whether distribution over a period of years is permitted. If the plan doesn't permit such distributions, your client should transfer the money to an IRA because it will be possible to withdraw the money from the IRA over a period of years. The money must be transferred directly from the 401(k) into the IRA because your client's employer is required to deduct 20 percent for taxes if the check is paid to your client rather than to the IRA.

By the way, the federal income tax rates start at 15 percent and go up to 39.5 percent. The 10 percent early distribution tax is applied to the total distribution in addition to the regular tax. As you can see, there is a big advantage to taking the money over a period of years so that the distribution is taxed at the 15 percent rate. Investment income is also sheltered from tax during the distribution period if the remaining money is left in the 401(k) or an IRA.

Question: In a previous column, you encourage employers to remove themselves from the role of investment gatekeeper and let employees have more choice. I am on a committee that oversees the investment choices for our mid-sized company. We wrestle with the question of giving employees more choice. Aren't some employees ill-prepared for this? Can you also speak about how to educate our employees to take advantage of this feature?

TB: Most employees are not prepared to sort through thousands of investment alternatives. As a result, the manner in which we move to an open environment in which all participants have thousands of alternatives available must be sensitive to the needs of all participants. The model I recommend has three tiers. The first tier would consist of three or more portfolios in which the specific funds are picked, monitored and replaced by an independent investment advisor that has no financial stake in how participants invest their money, such as mPower, the company that publishes this Web site. The second tier would contain one to three funds in each of the 10 to 12 investment categories. The categories would range from stable value/money market at the bottom end of the risk curve to special equity at the upper end. The independent investment advisor would pick one to three funds that meet the selection criteria in each of these categories. For example, the investment advisor would select three small-cap funds from the entire fund universe if there were three funds which passed the screening process. The third tier would be for those who want to build their own package using whatever support they want.

I know this thinking is a big step from where we are today, but I have come to the conclusion that it doesn't make sense for employers to be the investment gatekeepers. Why should employers be responsible and liable for how employees invest their money?

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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