Americans have this one ‘billion-dollar blind spot’ when rolling over 401(k) plans to IRAs — here’s what it is and how to fix it ASAP

The blind spot

The challenge may be one of rollover education. Just over two-thirds of Vanguard’s survey respondents who kept their cash investment after a rollover said they didn’t know how their IRA assets were allocated. Meanwhile, only one-third said their cash investment was intentional.

“Investors who are used to their 401(k) assets being automatically invested in target-date funds may believe that IRAs work the same way,” said Vanguard Investment Strategy Analyst Ariana Abousaeedi. “But there is no default investment like in 401(k) plans — money in IRAs requires active engagement to get invested.”

Whether it’s procrastination or playing it safe, pouring too much into cash hurts investors’ long-term financial health. Many investors are unaware their cash isn’t earning significant returns, Vanguard noted.

Even worse: As inflation erodes purchasing power over time, the real value of that cash savings diminishes — which means uninvested cash will miss out on substantial growth opportunities over long periods.

While cash can seem safe, especially in volatile market conditions, returns on savings accounts, money markets, or short-term deposits are typically minimal — and might not even keep pace with inflation.

For example, if inflation rises roughly 3% over a few years, but cash in an IRA is earning only 0.5% to 1%, the real value of that cash diminishes year after year. Since retirement accounts are designed to grow over decades, the loss of return from “cash drag” can be substantial.

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Be careful rolling over

A rollover from a 401(k) to an IRA is relatively straightforward, but it can be easy to overlook key details during the process. Here’s how it typically works:

• Decide on an IRA provider: The first step is choosing where to open an IRA. This can be with a financial institution, brokerage or robo-advisor.
• Request a direct rollover: When moving funds, it’s best to use a “direct rollover,” where the money moves directly from the 401(k) provider to the IRA provider. This avoids any taxes or penalties that might occur with an indirect rollover.
• Reinvest your funds: Once the money is transferred, it often sits in a default cash position within the IRA until the account holder decides where to invest it. This is where the common mistake happens — people leave the funds in cash, either because they’re unsure of what to invest in or they’re waiting for a “better” time to re-enter the market. But it’s a good idea to reinvest it anyway despite these hesitations.

Spotting — and fixing — the mistake

It’s important to regularly check your IRA’s balance to ensure that you’re not holding too much cash. Review the allocation and make sure it aligns with your long-term investment goals.

Before rolling over your 401(k), have an investment plan for your IRA. Diversification is key — consider a mix of stocks, bonds and other assets that match your risk tolerance and time horizon. If you’re unsure about actively managing your IRA, consider using a target-date fund that automatically adjusts your investments based on your retirement timeline or work with a financial advisor to configure a personal plan.

Even after investing, make it a habit to check the percentage of your IRA that’s sitting in cash. Keeping a small portion in cash for short-term needs is fine, but most of your retirement funds should be actively working for you in investments that have the potential to grow.

And because markets fluctuate, so should your investment strategy. It’s worth revisiting your portfolio annually to ensure it aligns with your retirement goals. Rebalancing your assets can help you avoid having too much money in cash as markets change.