Taking Care of Your 401(k)

Look But Don't Touch

Creating a diversified portfolio doesn't protect 401(k) investors from the greatest risk of all: The temptation to tap into that growing pool of money.

You can borrow against your 401(k) to help pay for your children's college tuition, the purchase of a house, or for other reasons in cases of full disability or serious financial hardship. Still, it's best not to withdraw money if you don't have to.

The penalty-free option of such borrowing costs more than it seems, warns Schwanbeck, even when interest rates are low. You still have to repay the borrowed money by making future -- and usually larger -- contributions to the fund.

"You're repaying yourself with money that's already been taxed, so there's a double whammy effect," he says.

Also, borrowed money isn't in your fund ready to appreciate when the markets rally.

Roll Over, Job Switcher

One good reason to touch that 401(k) plan is when you're changing employers.

You can leave the money where it is, transfer it over to your new employer's 401(k) plan or convert it to an individual retirement account.

If you work for a large company, odds are that your plan is bundled up with one of the larger mutual fund companies, which will continue to monitor your retirement investments, Schwanbeck says, as well as offer ample choice.

If you work for a smaller company, or one that merges or goes bankrupt, it could become a problem, says Meigs. "When it's time for you to run that 401(k) down, it'll be out there, but it's hard to find," he says.

The choice between your new 401(k) and an IRA depends on your plans for the money before retirement, Meigs says. A new 401(k) rollover creates a larger balance to borrow against, without penalties for early withdrawal. It also means better service from fund companies, says Schwanbeck.