This is the 'billion-dollar blind spot' of 401(k)-to-IRA rollovers, Vanguard finds
Many investors unknowingly make a costly mistake when rolling their money from a 401(k) plan to an individual retirement account: leaving their money in cash.
Rollovers from a workplace retirement plan to an IRA are common after reaching certain milestones like changing jobs or retiring. About 5.7 million people rolled a total $618 billion to IRAs in 2020, according to most recent IRS data.
However, many investors who move their money to an IRA park those funds in cash for months or years instead of investing it — a move that causes their savings to «languish,» according to a recent Vanguard analysis.
About two-thirds of rollover investors hold cash unintentionally: 68% don't realize how their assets are invested, compared to 35% who prefer a cash-like investment, according to Vanguard.
The asset manager surveyed 556 investors who completed a rollover to a Vanguard IRA in 2023 and left those assets in a money market fund through June 2024. (Respondents could report more than one reason for holding their rollover in cash.)
«IRA cash is a billion-dollar blind spot,» Andy Reed, head of investor behavior research at Vanguard, said in the analysis.
The retirement system itself likely contributes to this blind spot, retirement experts said.
Let's say a 401(k) investor holds their funds in an S&P 500 stock index fund. The investor would technically be liquidating that position when rolling their money to an IRA. The financial institution that receives the money doesn't automatically invest the savings in an S&P 500 fund; the account owner must make an active decision to move the money out of cash.
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