A Costly 401(k) Rollover Mistake Could Trim $130,000 From Retirement Savings

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Many American workers have made an expensive error after moving their 401(k) savings into an individual retirement account, or IRA.

According to a Vanguard review of IRA data from 2015 through 2022, about 28% of savers who rolled over retirement money into an IRA failed to reinvest it and let the funds sit in cash in the new account for at least seven years.

“Cash is the de facto default for individual retirement account contributions, despite being generally prohibited as a default investment option in 401(k) plans,” the researchers wrote. “Unless individuals voluntarily invest IRA assets, they tend to stay in cash indefinitely.”

Vanguard estimated that this mistake reduces retirement wealth by $172 billion a year across savers. On an individual basis, that can amount to more than $130,000 in missed wealth by retirement age.

The issue is widespread. The IRS says roughly 5 million Americans roll retirement savings into IRAs each year, and Vanguard’s research suggests at least 1.4 million of them do not reinvest those rollover funds.

Rollover mistakes are especially common among younger investors

A 401(k) rollover is a common move for workers who change jobs and transfer money from an old employer plan into an IRA. Although workers are not required to do this, since they can keep multiple 401(k) accounts, many choose the rollover to simplify their finances and gain more control over their savings.

The Tax Policy Center says nearly 65 million Americans own IRAs. While more people participate in employer plans such as 401(k)s or 403(b)s, the total balances held in IRAs now exceed workplace retirement plans.

Vanguard said Americans have more than $13 trillion in IRAs, around $3 trillion more than in employer-sponsored plans. A major reason is rollovers: in 2020, 88% of IRA contributions came from rollover money rather than direct deposits.

Still, many savers miss the final step needed to put that money to work. Vanguard’s study indicates a sizable share of IRA assets are sitting in cash instead of being invested in the stock market.

The research also found that some groups are more likely than others to leave rollover money uninvested. Age, gender and wealth all played a role.

Investors in their 20s were much more likely than older savers to leave their IRA balances in cash, and most of them had still not invested after seven years. The same pattern appeared among account holders with balances of $5,000 or less. By contrast, older and wealthier investors typically moved the cash into investments within a few months of the rollover.

Women were also found to be “significantly more likely” than men to keep rollover balances in cash, regardless of age or wealth.

Although Vanguard focused on rollovers, forgetting to invest is a common IRA mistake more broadly. In recent years, many younger investors have shared such errors on social media in hopes of helping others avoid them.

“Wanna hear something that will make you feel better about yourself?” TikToker Kayla Caneat asked in a viral video. She said she made monthly Roth IRA contributions for more than two years before realizing the money had never been invested.

“I never bought a single stock,” she said, staring straight into the camera. “I thought it was automatic.”