Beware of Traps: The Pitfalls of Rolling Over a 401(k) to an IRA

Many Americans still trust in holding a portion of their retirement portfolio in cash. However, according to a new study by Vanguard, this could be a costly mistake when transferring 401(k) plans into IRAs. While cash is considered a safe haven, it can lead to significant 'cash drags' in an Individual Retirement Account (IRA), affecting long-term returns. The main issue seems to lie in the knowledge gap during the rollover process. A survey by Vanguard found that over two-thirds of respondents who invested in cash after a rollover had no idea how their IRA assets were actually allocated. Many mistakenly assume that IRAs function automatically like 401(k) plans. 'Money in IRAs requires active involvement,' explains Ariana Abousaeedi, an analyst at Vanguard, emphasizing the difference. The impacts are significant: unnoticed, capital held in cash is increasingly devalued by inflation, ultimately missing out on growth opportunities. Potential gains remain untapped when too much cash in the IRA is not invested in profitable assets like stocks or bonds. To avoid potential pitfalls, it is advisable to regularly check the IRA balance and pursue an investment strategy that considers diversification. Prudent management, either through a self-configured portfolio or with the help of a financial advisor, can help maintain balance. Also, an annual reassessment of the investment strategy is advisable to adapt to market changes. In conclusion, a small reserve in cash may be reasonable, but the main portions of retirement savings should be profitably invested to meet long-term goals.