The common 401(K) rollover mistake costing savers tens of thousands
Americans are missing out on investment gains by accidentally taking their retirement savings out of the stock market after switching jobs, experts warn.
When people roll a 401(K) workplace plan over into an individual retirement account, the money is frequently held in cash until the saver chooses new investments.
However, many Americans forget to select new investments and unintentionally leave their money sitting in cash, new research from Vanguard Group shows.
This means they are missing out on a total of $172 billion in retirement wealth which could be generated if they instead put the money in stocks and bonds. This can be as much as $130,000 per person.
Younger investors, women and those with smaller balances are especially prone to staying in cash for years following a rollover, the study found, robbing them of valuable gains through compound interest.
Americans are missing out on investment gains by accidentally taking their retirement savings out of the stock market after switching jobs, experts warn
For investors under the age of 55, Vanguard estimates the long-term benefit of investing in a target-date fund, versus staying in cash, is equivalent to an average increase of at least $130,000 in retirement wealth at age 65.
Cash is the de facto default for individual retirement account (IRA) contributions, according to Vanguard.
This is despite it being generally prohibited as a default investment option in workplace 401(K) plans.
IRA cash is highly 'sticky', Vanguard said.
Unless Americans voluntarily invest their IRA assets in stocks and bonds, they tend to stay in cash indefinitely.
Among rollovers conducted in 2015, 28 percent remained in cash for at least seven years.
This mistake is common, and particularly costly for younger workers who may be used to their retirement savings being automatically invested in company plans.
Stocks and bonds typically provide much higher returns than cash.
Cash-like investments have received a boost since the Federal Reserve began hiking interest rates - up from close to zero in 2021.
Money-market funds now pay annual interest of around 5 percent, The Wall Street Journal reported.
According to investment research firm Morningstar Direct, US large cap stocks have gained 7.19 percent a year on average, compared to just 0.31 percent for cash.
Over the years, compound interest grows these larger stock market gains - snowballing as income is earned on an ever-larger account balance.
Holding retirement savings in cash is also a problem for older savers, who tend to need some exposure to stocks to ensure their money lasts, The Wall Street Journal reported.
The huge sums unintentionally kept in cash are a growing concern since IRAs have become the dominant way in which Americans hold their retirement savings, Fiona Greig, global head of investor research and policy at Vanguard, told the outlet.
Holding retirement savings in cash is also a problem for older savers, who tend to need some exposure to stocks to ensure their money lasts
IRAs have become the dominant way in which Americans hold their retirement savings, said Fiona Greig, global head of investor research and policy at Vanguard
Brie Pio, a financial advisor from Maine, said a couple who hired her in 2021 had rolled more than $400,000 over from a 401(K) plan to an IRA the year prior.
They did not realize the money was sitting in cash, and Pio estimated they lost around $100,000 by missing a stock market rally.
'They couldn't figure out why they weren't earning any money when the stock market was showing high returns,' Pio said.
When leaving a job, Americans can keep their 401(K) balance with their old company, roll it into a new 401(K) workplace plan or move it into an IRA.
An IRA gives savers more options for where to invest their money, but it is not typically invested in the market.
Some people put off making decisions about where to invest the money as they are overwhelmed by the thousands of options IRAs offer, Andy Reed, head of investor behavior research at Vanguard, told the Wall Street Journal.
Others mistakenly assume the company that serves as custodian for their IRA, such as Vanguard or Fidelity Investments, will automatically invest their savings for them as many 401(K) plans do.
Without reminders to invest the funds, 'a great deal of IRA investors would stay in cash forever,' he added.
