Many workers who leave a job end up rolling the money from their 401(k) plan into an IRA. And while that can be a wise decision, it can backfire spectacularly if you make one crucial mistake.
Nearly one-third of people — 28% — who rolled money into a Vanguard IRA in 2015 left the money sitting in cash for the next seven years, according to Vanguard research.
That means those folks missed out on large gains in the stock market, potentially dooming themselves to a much smaller nest egg and a reduced standard of living during retirement.
Vanguard estimates that, in total, these savers are losing out on more than $172 billion a year in retirement wealth.
The unfortunate trend is especially prevalent among three groups of investors:
- Younger people
- Women
- Those with smaller balances
As Vanguard notes, rollovers into IRAs often end up as cash by default. That means the person making the rollover must specifically state if he or she wants the money to flow into investments instead.
Leaving cash uninvested is a “significant problem that hinders millions of Americans saving for retirement,” according to Vanguard.
In the study, Vanguard suggests one possible solution to the problem: a new regulation that would mimic a 2006 law that allows 401(k) plans to automatically enroll workers in diversified portfolios.
Vanguard says extending the law to IRAs would ensure that rollover money ends up in target-date funds or similar types of diversified investments.
However, an easier way to fix the problem is simply to make sure you designate where you want your money to go when rolling it into an IRA.
The process of rolling money into an IRA may already have improved in one way. For more, check out “How Retirement Account Rollovers Just Got Better.”
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