One of the many questions I get peppered with from clients sounds something like this: "I just changed jobs. What do I do with my old employer retirement plan?" Almost invariably the correct answer is to roll over the funds to something called a "Rollover IRA".

Rolling over your old employer(s) retirement funds means dramatically expanding your investment options giving you more control over you hard earned investments. Remember that this money is your money and if you have the opportunity to gain control of your money, that is a good thing. You see, employers are restricted to some extent, under ERISA, as to how many investment options should be made available.

Until the passage of the Pension Protection Act in August of last year, employers were not even allowed to offer you investment advice on your investment options. Thankfully, that restriction has been removed and now employers, or more specifically, the investment firm administering the retirement plan, can provide desperately needed investment advice to participating employees. Still, even with this restriction eliminated, the typical qualified retirement plan typically only offers a limited number of investment options.

The main rationale for this is to limit confusion to employees in the hope that doing so will increase participation in the plan. A typical retirement plan may have between eight to twelve investment options. Some go as high as fifteen. A typical Rollover IRA, however, will have infinitely more investment options to choose from, thus increasing your opportunities to meet your individual risk tolerance profile.

A risk tolerance profile is typically a questionnaire a client will complete that scores the individual client’s “Time Horizon” (how long they will keep the funds in the IRA) and their “Risk Tolerance” (how conservative or aggressive an individual is with their investments). With this “score” in hand I am able to tailor a client’s investments to meet their Time Horizon and Risk Tolerance profile.

With a Rollover IRA I can spread out my clients’ risk by selecting among numerous mutual funds. If one of the more aggressive fund selections does badly, the more conservative fund selections come to the rescue by providing some return on investment, thus mitigating, to some extent, the amount of the loss in their IRA caused by that aggressive fund’s decline. The hope is that the aggressive fund will bounce back eventually and provide a sizable return on investment in the IRA, bringing the investment return into alignment with the targeted overall return mutually agreed upon by the client and I when we set up the Rollover IRA.

Individual risk tolerance falls into the following categories:

• Conservative
• Conservative-Moderate
• Moderate
• Moderate-Aggressive
• Aggressive

Individuals with a conservative risk tolerance profile can expect to see returns in the 3-5% range. These individuals will be invested in mutual funds with the following underlying investments: Stocks (20%), Bonds (60-70%) and Cash (10-20%). Moderate-conservative individuals can expect to see returns in the 4-6% range. These individuals will be invested in mutual funds with the following underlying investments: Stocks (40%), Bonds (50%) and Cash (10%). Moderate individuals can expect to see returns in the 5-7% range. These individuals will be invested in mutual funds with the following underlying investments: Stocks (60%), Bonds (35%) and Cash (5%). Moderately-aggressive individuals can expect to see returns in the 7-10% range. These individuals will be invested in mutual funds with the following underlying investments: Stocks (75%), Bonds (20%) and Cash (5%). Aggressive individuals can expect to see returns in excess of 10%. These individuals will be invested in mutual funds with the following underlying investments: Stocks (90% or more), Bonds (10%) and Cash (0%).

After reading the last paragraph you might decide to declare yourself aggressive, since almost everyone seeks high returns. Not so fast. Remember 2001 and 2002? Many investors lost as much as 30% of their investment value during those two years. Many of those same individuals desperately tried to get out of their investments into more conservative investments. Why? Because they were conservative investors who were invested in aggressive investments.

They were sheep in wolf’s clothing. The truly aggressive investor stayed put during 2001 and 2002, knowing that the market has bull and bear markets and understanding that, based on their risk tolerance profile, they were going to ride out the bear markets in order to pick the fruit of the bull markets. Too many investors are conservative-minded but get lured into the aggressive category by bull markets. When the bull markets turn to bear markets, their true risk tolerance profile emerges; they shed their wolf clothing and they scurry to get out of their investments.

This is why it is important for financial advisors, like myself, to insure that our clients are properly classified as to their risk tolerance. I have had clients tell me they want their money invested in funds that will generate the highest possible return. I say fine, but first can you please complete this risk tolerance questionnaire? When I score the questionnaire, low and behold they are anything but aggressive. I then explain to them their risk tolerance profile, tailor their investments to meet their profile and invest their money accordingly.

When can you do a rollover? Generally, when you are fired or change employers. Your old employer will ask you what you want to do with your retirement plan money. Do not ask them to distribute it to you. This will result in immediate taxation. Your response is to tell them that you need to speak to your financial advisor first. Then see your advisor and he or she should profile you as to your risk tolerance and tailor your investment selections to meet your risk tolerance profile. Your advisor will need your latest statement and the address of the plan’s administrator as well as the address of the institution managing the retirement plan. The rest is just paperwork.