Workers who pull their retirement savings out of the stock market after changing jobs miss out on billions in investment gains, usually without meaning to, writes Anne Tergesen for The Wall Street Journal.

When individuals transfer their 401(k) balances from their previous employer’s plan into an individual retirement account, these funds are often held as cash until they choose new investments. According to new research from Vanguard, many never do. Almost a third of those who rolled savings into their IRAs at Vanguard in 2015 still had that balance sitting in cash in 2022.

Americans who are holding cash-heavy IRAs lose more than an estimated $172 billion a year in retirement wealth they could have generated had they invested in stocks and bonds, per the Vanguard study.

This is a common and often costly mistake, particularly for younger workers who are used to having their savings automatically invested in company plans. They are at risk of losing years of potential gains that build retirement wealth through compounding over decades.

Financial advisors agree that this issue is also important to older savers who often need some exposure to stocks to make sure their money lasts.

This is why it is important to know that when you roll your 401(k) account into an IRA, the company administering the 401(k) usually sells your holdings and moves the cash into your IRA. Some investors put off making decisions on what to do with the cash because they are overwhelmed by the thousands of investment options offered by IRAs. Meanwhile, some assume the company that is a custodian for their IRA will automatically invest their savings for them, which is not the case.

Without reminders to move their money out of cash, “a great deal of IRA investors would stay in cash forever,” said Andy Reed, head of investor behavior research at Vanguard and a co-author of the study.

“One of the benefits of working with any decent financial advisor is when there are 401(k)-to-IRA rollovers, they tend to have an investment plan that does not leave the entire balance as cash — probably because the advisor doesn’t get paid on cash,” said Fred Hubler, the CEO and Chief Wealth Strategist at Creative Capital Wealth Management Group in Chester Springs. “However, cash in an allocation is not a bad thing, and we actually count it as an absolute return type of allocation since it normally can’t go down.”

Read more about 401(k) rollovers in The Wall Street Journal.

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