When workers change Jobs, they often roll their 401 (k) balances into individual retirement accounts (IRAs). This transition frequently leads to a costly oversight: the retirement savings are held as cash until the individual selects new investments, and many never do. This can result in missing out on substantial investment gains.
Younger workers, accustomed to their savings being automatically invested in their company plans, are particularly at risk of missing out on years of potential growth by leaving their IRA funds uninvested. Given that IRAs have become the dominant way Americans hold their retirement savings, the amount of money sitting in cash is concerning.
When leaving a company, employees have several options: they can keep their 401 (k) balance with their old employer, roll into a new employer’s plan, or transfer it to an IRA. While IRAs offer a wide array of investment choices, the downside is that the funds are not automatically invested and often remain in cash until the individual takes action.
Some people delay investing their IRA funds due to the overwhelming number of options available, while others wrongly assume that the company managing their IRA will automatically invest their savings, as the 401 (k) plans did. This misconception can lead to significant lost opportunities for growth.
In today’s economic climate, investing is far more beneficial than keeping funds in cash. For example, money market funds currently offer an annual interest rate of around 5%, compared to near-zero rates just a few years ago. Any form of investment generally yields better returns than leaving money in cash.
This issue is particularly prevalent among younger individuals. In 2023, around $701 billion was moved from 401 (k) plans to IRAs. To address this problem, Vanguard, the largest provider of age-based investment funds, advocates extending the legal protections of a 2006 law that allows 401 (k) plans to automatically enroll workers in diversified portfolios to IRAs. Researchers believe that implementing such a policy for IRAs could significantly increase the average IRA balance over time.
Failing to invest rolled-over retirement savings is a widespread and costly mistake. By recognizing the importance of promptly investing IRA funds, individuals can avoid missing out on substantial investment gains and better secure their financial futures.
Sources
Schwab.com. (n.d.-b). Rollover old 401(k)s into IRAS with Schwab. Schwab Brokerage. https://www.schwab.com/ira/rolloverirasrc=SEM&s_kwcid=AL%215158%2110%2179646058548803%2179646293105895&ef_id=75455b4a4ff712edc8763deb72c328ab%3AG%3As&keywordid=79646293105895&msclkid=75455b4a4ff712edc8763deb72c328ab
Tergeson, A. (2024, July 22). The 401(k) rollover mistake that costs retirement savers billions. The Wall Street Journal. https://www.wsj.com/personal-finance/retirement/the-401-k-rollover-mistake-that-costs-retirement-savers-billions-c7a19dfa
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