Here's How to Avoid Sabotaging your 401(k) Plan

Some large 401(k) plans offer mutual funds that aren't available in retail IRAs. Large plans may also be able to offer funds with lower fees than the versions available for small investors.

In addition, 401(k) plans offer better protection from creditors, Walsh says. Both IRAs and 401(k)s are protected from creditors if you file for bankruptcy, she says. In some states, though, IRAs aren't protected from judgments resulting from a lawsuit, she says.

But rollovers offer advantages, too. You may have access to a greater selection of investment options and, in some cases, lower fees. Once you hit retirement, your IRA provider will offer flexible withdrawal options, depending on your income needs.

With a 401(k) plan, the plan administrator determines how often you can take withdrawals, she says. With an IRA, she says, "It's your account, and you make the rules."

3. Pay attention to fees. Because most of us don't even look at our quarterly 401(k) plan statements, it's asking a lot to insist that we also scrutinize the fees. And figuring out how much your plan is charging is difficult even for experienced investors.

But high fees are like carpenter ants: By the time you notice them, the damage has been done. Fees that eat into your savings include recordkeeping, administrative, investment advisory and brokerage costs. If your plan is packed with high-cost funds, that's an additional drain on your investment returns.

Figuring out how much you're paying in fees is about to get easier: Starting next year, the Department of Labor will require companies to give 401(k) plan participants a breakdown of plan fees. In the meantime, there are other tools available. BrightScope, an independent website, provides ratings for thousands of 401(k) plans at www.brightscope.com. The AARP offers a 401(k) fee calculator at aarp.org/401kfees. You have to register to use it, but registration is free.

Workers for small companies should be particularly vigilant about fees, says Christine Benz, personal finance director for Morningstar.com. Because these companies don't have a large amount of assets to invest, they don't have as much negotiating clout as large and midsize companies, she says.

Of course, identifying onerous fees won't make them disappear. One option is to have a friendly chat with your human resources department. If that's unsuccessful, you may want to invest only enough money to get your company match and put the rest of your savings in a low-cost IRA, Benz says. Fees should also be a consideration when deciding whether to roll over your savings into an IRA when you leave your job, Benz says.

4. Resist the temptation to take hardship withdrawals from your 401(k) plan. Under IRS guidelines, 401(k) plan administrators can allow workers to take hardship withdrawals only for specific reasons, including medical bills, the threat of foreclosure and tuition payments. Sadly, with unemployment still above 9%, many families have had no trouble qualifying for a hardship withdrawal. In the second quarter of 2010, a record 2.2% of Fidelity plan participants took hardship withdrawals from their savings, according to Fidelity.

If you're at risk of losing your home, a 401(k) may seem like an unaffordable luxury. But nearly 13% of workers who took hardship withdrawals last year said they were using the money to pay for education, according to Aon Hewitt. Your child can borrow to pay for college, or attend a less expensive school. You can't borrow to pay for retirement.

When you take a hardship withdrawal, you'll have to pay income taxes on the money, plus a 10% penalty if you're under 59½.