What happens to an employee's funds when they leave an employer-sponsored retirement plan?

When an employee leaves an employer-sponsored retirement plan, they generally have the option to withdraw their funds and transfer them to a self-directed IRA. This choice allows individuals to take control of their retirement savings and manage their investments according to their preferences and risk tolerance.

Transferring to a self-directed IRA is beneficial because it enables greater flexibility in investment choices, which can potentially lead to improved asset growth over time. Additionally, when done correctly, this transfer may be executed as a direct rollover, which avoids any immediate tax implications and maintains the tax-deferred status of the retirement funds.

The other options present scenarios that are not typically available. Employees do not lose all contributions made; they retain ownership of their vested amounts. Although some may choose to leave the funds in the employer’s plan, it is not a requirement and might not always be the best course of action. Furthermore, while rolling over to another employer’s plan is an option, it is not the only alternative available, making the transfer to a self-directed IRA a more comprehensive solution.