BLOOMINGTON - It's bad enough that the recession has claimed so many jobs, but the unemployed must also confront decisions about what to do with company 401(k) plans.

Financial advisers say clear thinking is essential, especially for older workers.

Planners are talking to an increasing number of people about their 401(k) funds as layoffs increase, and say there are three options for a 401(k) account: cash it out; leave the funds in a former employer's plan or convert the 401(k) into another qualified retirement plan, such as an individual retirement account.

While 401(k)s and IRAs are both pre-tax shelters for retirement, a 401(k) is an employer-sponsored plan and an IRA is set up by the individual.

The advisers are unanimous in cautioning against the cash out option unless there's a desperate need for cash.

That's because cashing out negates what was saved for retirement and also requires a 20 percent tax withholding to the Internal Revenue Service, as well as a 10 percent early withdrawal penalty if you're younger than 59 ½.

"You will shoot yourself in the foot," said Carol Burroughs, a certified financial planner in Normal.

When David Stokes, a financial planner and stockbroker with Edward Jones in Bloomington, hears a client talking about cashing out he advises a 401(k) loan for the minimum amount needed instead.

And while leaving the 401(k) with a previous employer's plan is better than cashing out, financial advisers caution that by doing that you also give up some control. You give up, for instance, the ability to add to the 401(k), said Stokes.

Additionally, some 401(k) plans have limited investment choices and rolling the savings over to an IRA could give investors more choices, Stokes said.

The financial advisers are unanimous in favoring direct rollover to an IRA.

"Direct rollover is by far the best option," said Stokes. He said that direct rollover avoids the 20 percent withholding and is quick and efficient.

Though all the options can be daunting, good planning is necessary because the wrong steps can have a negative impact, said Stokes, and it's especially important for those over 55.

With the recession putting more out of work, Stokes deals with questions about what to do with 401(k) accounts on a weekly basis.

He knows the issues are stressful. "You will get through it. The sun will shine tomorrow." he said.