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Rolling Over Your 401(k)? This Common Mistake Could Cost You $130,000
By Adam Hardy MONEY RESEARCH COLLECTIVE
People often don’t reinvest their 401(k) money, losing the chance to earn crucial stock market returns, according to a new study.
Millions of American workers have made a costly mistake when they rolled over their 401(k) money into an individual retirement account, or IRA, according to new data.
Some 28% of savers who rolled over their retirement funds into an IRA in 2015 did not reinvest the money — leaving it to sit as cash in the new account — for at least seven years, investment firm Vanguard found in an analysis released Monday.
“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 the mistake costs retirement savers a collective $172 billion per year in retirement wealth. Per person, that equates to more than $130,000 of forgone wealth by the time the person reaches retirement age.
It’s a widespread problem: IRS data shows that about 5 million Americans roll over retirement savings into IRAs each year. Of them, Vanguard study suggests that at least 1.4 million aren’t reinvesting their rollover contributions.
Rollover blunders worse for younger investors
Known as a 401(k) rollover, many job-switchers opt to move their retirement savings from their old company’s 401(k) plan into an IRA upon departure. While this is generally not required — workers can have as many 401(k)s as they want — it’s a popular way to consolidate retirement accounts and have more control over them.
According to the Tax Policy Center, a nonpartisan think tank, nearly 65 million Americans own IRAs. While far more Americans hold employer-sponsored plans like 401(k)s or 403(b)s, the collective balances of IRAs now dwarf retirement plans through the workplace.
Per Vanguard, retirement savers hold more than $13 trillion in IRAs, about $3 trillion more than employer-sponsored plans. A large reason why is because of rollovers: Each year, the vast amount of contributions into IRAs are rollover funds (88% in 2020) as opposed to direct contributions.
But sometimes people don’t take the final step to maximize their money when moving those 401(k) funds. Vanguard’s study suggests a significant portion of the $13 trillion in IRAs is allocated as cash, and thus not earning crucial stock market returns.
What the study also found was that some people are more likely than others to accidentally leave their rollover contribution languishing in their IRA. Age, gender and wealth were all major factors.
For instance, twentysomething investors were far more likely than their elders to have their IRA balances left as cash. In fact, the majority of them were found to have not invested their balances after seven years. The same was the case for account holders with smaller balances of $5,000 or less. By contrast, older and wealthier investors usually reallocated the cash within a few months of the rollover.
Regardless of age or wealth, Vanguard found that women were “significantly more likely” than men to keep their rollover balances in cash.
Though the financial firm’s analysis was centered around rollovers, overlooking this crucial step is a common IRA issue. In recent years, many young investors have taken to social media to share their investment blunders in a bid to keep others from making the same financial folly.
“Wanna hear something that will make you feel better about yourself?” TikToker Kayla Caneat asked in a 2022 video that has racked up more than 2 million views. She explains that she contributed monthly into a Roth IRA for over two years before she realized the money wasn’t invested.
“I never bought a single stock,” she said, staring deadpan into the camera. “I thought it was automatic.”
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Adam Hardy is Money's lead data journalist. He writes news and feature stories aimed at helping everyday people manage their finances. He joined Money full-time in 2021 but has covered personal finance and economic topics since 2018. Previously, he worked for Forbes Advisor, The Penny Hoarder and Creative Loafing. In addition to those outlets, Adam’s work has been featured in a variety of local, national and international publications, including the Asia Times, Business Insider, Las Vegas Review-Journal, Yahoo! Finance, Nasdaq and several others. Adam graduated with a bachelor’s degree from the University of South Florida, where he studied magazine journalism and sociology. As a first-generation college graduate from a low-income, single-parent household, Adam understands firsthand the financial barriers that plague low-income Americans. His reporting aims to illuminate these issues. Since joining Money, Adam has already written over 300 articles, including a cover story on financial surveillance, a profile of Director Rohit Chopra of the Consumer Financial Protection Bureau and an investigation into flexible spending accounts, which found that workers forfeit billions of dollars annually through the workplace plans. He has also led data analysis on some of Money’s marquee rankings, including Best Places to Live, Best Places to Travel and Best Hospitals. He regularly contributes data reporting for Best Colleges, Best Banks and other lists as well. Adam also holds a multimedia storytelling certificate from Poynter’s News University and a data journalism certificate from the Investigative Reporters and Editors (IRE) at the University of Missouri. In 2017, he received an English teaching certification from the University of Cambridge, which he utilized during his time in Seoul, South Korea. There, he taught students of all ages, from 5 to 65, and worked with North Korean refugees who were resettling in the area. Now, Adam lives in Saint Petersburg, Florida, with his pup Bambi. He is a card-carrying shuffleboard club member.