What to do with your 401(k) or 403(b) if you lose your job?

Short answer: Whatever you do, don't leave it in your old employer's plan. You want to roll it over to an individual retirement account, also known as an IRA.

A few years back, my husband and I were on our way to the airport. We were flying to Phoenix for my grandmother's 85th-birthday celebration. We had the radio on in the car, listening to an investment show on the radio (not mine, obviously).

A caller asked the host whether or not he should rollover his 401(k) into an IRA when he left his old employer. The host emphatically replied yes, the caller should not leave his 401(k) with his former employer.

Then the caller said, “I've always heard that. Can you tell me why that is?” The host then explained that you are in danger of losing your 401(k) if your former employer goes out of business. The radio show host gave the right answer, but then he gave the wrong reason!

Your employer, current or former, is not the custodian of your 401(k) account. The employer doesn't hold the money. A third party does. So the concern isn't that your employer may go bankrupt.

So you may be thinking to yourself, what if the bank, brokerage or insurance company who has custody of my 401(k) money goes under - like Bear Stearns did?

Not to worry. The money you have invested in your employer sponsored retirement plan, or any brokerage account for that matter, is held in completely separate subaccounts. It cannot be comingled with other funds and the custodian can't use your money to pay its bills or debt under any circumstances.

In the off chance your plan custodian did go under, your company, which is called the plan sponsor, will either transfer the plan to another custodian, or, more likely, the custodian will be taken over and your company will become a client of that new company.

So if bankruptcy isn't the issue, why is it so important to roll your 401(k) or 403(b) to an IRA when you leave your employer? The primary driver of the move is that you have more investment alternatives in an IRA than in an employer sponsored plan.

In a 401(k), you are probably limited to the mutual funds offered by your plan administrator. In an IRA, you can buy and sell the entire universe of investment alternatives - including all stocks, bonds, mutual funds, options, real estate, and even privately held companies.

While that is the most important reason to roll your 401(k) over into an IRA when you leave, there are others.

If invested properly, your fees will probably be lower in an IRA than a 401(k). Fees are very important for three reasons: 1) reducing fees is risk free return - it may be the only free lunch in investing; 2) reducing fees leaves more money in your pocket to compound over time and compounding is a miraculous thing; and 3) studies show the one thing most correlated with performance, over time, is not the fund manager, the sector, the asset class or the historical performance, but low fees.

As a general rule, fees are highly inversely correlated to portfolio performance - the higher the fees, the worse the performance. The lower the fees, the better the performance - which is, of course, a very practical reason why you should learn to be your own money manager.

Another reason is easier access to your money, although I'm not sure this is such a good thing. If you want to rob your retirement account, you don't have to ask for permission, nor is there any bureaucratic paperwork. You have a thousand miles of rope to hang yourself with.

Another benefit is you can split IRAs between multiple beneficiaries and IRAs are easier to allocate when you have non-spousal heirs.

While you are employed, you have to try to max out your employer sponsored retirement plan if you can. At a minimum, you have to contribute enough to get the employer match, if there is one. But if there is a silver lining to losing your job, being able to self-direct your retirement funds is one.

Get that money rolled over to an IRA as soon as you can. Never leave your 401(k) with your old employer, and even worse, never ever roll your old 401(k) money into your new employers plan when you are lucky enough to find a new job.

Myths and Misconceptions about Exchange Traded Options

There are a variety of long-standing myths about options that need to be dispelled. The most widely held are: 1) options are too risky; 2) they're too complicated or you're not smart enough to use them; 3) you cannot use options inside of an IRA account; and 4) options on General Electric, for example, are no different than the exotic, highly esoteric derivatives that caused the current financial crisis.

And of course, many financial advisors have done nothing to dispel these myths. In fact, to a large degree, they have willingly helped to perpetuate them.

Misconception: Options are risky.

Risk is just the probability of an unfavorable outcome. Everyone has a threshold at which that probability becomes unacceptable. This is known as "risk tolerance." Old thinking says buying and selling options is a high risk strategy. That reputation has always frustrated me - mainly because it is completely false. Granted, with more risk comes greater reward, but it is possible to manage the tradeoff between the two.

By their nature, options are not risky. Buying and selling an options contract is mathematically a zero sum game. There is one winner and one loser on each side of any one option contract. When the buyer wins a dollar, the seller loses a dollar and vice versa. So, by definition, options are not inherently risky. They are a tool - a means to an end. Nothing more.

Think about the hammer in your toolbox. It is not dangerous in and of itself. But, if used carelessly, it could do real harm. Ask anyone who has smashed the dickens out of his thumb. But you don't hear public service announcements warning you away from using hammers because they might hurt your thumb.

So, back to options. If risk is not inherent in options, why all the bad press? The problem lies in the way people are taught to use them. Options can be risky when used to place a bet on the future direction of stock price. You might just as well pile your money up in the front yard, pour gasoline all over it and strike a match. Because you are placing a bet - a highly leveraged bet, no less - on a totally random event. Would you take your life savings to a Las Vegas roulette wheel and plunk it all down on black? What do you think will happen?

It is a travesty that so many sensible investors have been suckered into crap seminars that teach you how to use options ... to lose your money. It's just wrong - and that is why the myth, that options are risky, still persists. But it is absurd to say options are risky. It is using them incorrectly - like grabbing a knife by the sharp end - that makes them risky.

Lesson One: Options are not inherently risky or safe, any more than credit cards are inherently evil. It is how you use them that makes them one or the other.

The preceding is an excerpt from my newest special report: "A Surprising Solution for Creating Sustainable Retirement Income." You can download the full report for all five of the widely-held myths about options. Please share it with anyone you think would benefit from the information.

If reading isn't your thing, but you really want to learn more about how to solve your biggest investment worries -- whether you're in the Dallas Fort Worth area or not -- I encourage you to attend one of my upcoming Investor Briefings in January. (They are FREE! And offered both live and online.) I will discuss current trends standing between you and financial freedom and offer up solutions to your specific challenges. Register now.

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All investments involve risk including possible loss of principal. Please see our Owner's Manual for a complete discussion. More information can be found on our website or by calling 1-866-9SNIDER.