From CNBC: 2024-09-16 13:57:04

Many investors make a costly mistake when rolling their money from a 401(k) plan to an IRA by leaving it in cash. Rollovers are common, with about 5.7 million people rolling $618 billion to IRAs in 2020 per IRS data. Approximately two-thirds of rollover investors unintentionally hold cash.

The blind spot in the retirement system leads investors to unknowingly leave their assets in cash when moving to an IRA. Financial institutions do not automatically invest the savings, requiring account owners to make an active decision. About 48% wrongly believed their rollover was automatically invested, according to Vanguard’s survey.

Holding cash may be sensible for short-term needs like emergencies or a down payment, but long-term accumulation in cash can be detrimental. Interest on cash may not keep up with inflation or generate an adequate nest egg for retirement. Relatively high cash returns may have lulled investors into a sense of security, but interest-rate cuts are expected.

Investors should question if rolling money from a 401(k) plan to an IRA is necessary, as there are pros and cons to consider. Putting meaningful money in cash long-term is cautioned against, as history shows it may not make financial sense. Investors are advised to start repositioning excess cash given the expected interest-rate cuts by the U.S. Federal Reserve.

Read more: 401(k)-to-IRA rollovers have a ‘billion-dollar blind spot’: Vanguard