401(k) Rollover Error Costs Employees Billions

Here’s a common rollover scenario: An individual leaves one employer for another. The previous employer offered a 401(k) plan.

The individual rolls over the money in his or her 401(k) into an individual retirement account (IRA) sponsored by the new employer. But the employee doesn’t select index funds that invest in stocks and bonds.

“Cash is the de facto default for IRA contributions, despite being generally prohibited as a default investment option,” warns Vanguard in a research report, Improving Retirement Outcomes by Default: The Case for an IRA QDIA. QDIA stands for qualified default investment option.

“Among rollovers conducted in 2015, 28% remained in cash for at least seven years [emphasis ours],” Vanguard notes. As a result, investors lost a whopping $172 billion in retirement benefits because their money wasn’t in the stock and bond markets. Evidence suggests some folks were likely overwhelmed by the hundreds of investment choices available with their IRA, and then for one reason or another, failed to follow through on selecting funds.

“For investors under age 55, we estimate that the long-term benefit of investing in a target-date fund (versus staying in cash) upon rollover is equivalent to, on average, an increase of at least $130,000 in retirement wealth at age 65,” says Vanguard, which examined 68,000 rollovers worth at least $1K.

Rollover to Just Cash is Fine by Many

The Vanguard report shows that employees 55 and older are less likely to keep rollovers in money market accounts. Which is interesting — the closer employees are to retirement, the more it makes sense to be conservative with their money. At least that’s the advice financial advisors always gave to their clients. It’s Millennials and Gen Z that need to be more aggressive in their investing strategies.

The cash-parking trend shows no sign of slowing. Total money market fund assets have climbed to $7.77 trillion as of May 2026, up from $6.15 trillion when Vanguard published its research – a jump of more than $1.6 trillion in under two years. The appeal is understandable. Money market funds still offer short-term income with daily liquidity. But for employees who rolled over a 401(k) but never moved their money into the market, the cost of staying in cash compounds every year they wait.

What’s more, the problem may be getting larger, not smaller. The SECURE 2.0 Act of 2022 raised the threshold for involuntary rollovers from $5,000 to $7,000, effective in 2024. That means more small-balance accounts are now automatically rolled into IRAs when employees leave a job – and as Vanguard’s research shows, those balances are likely landing in cash and staying there. Regulators are paying attention: Vanguard’s research is specifically pushing for IRA providers to be permitted to implement a qualified default investment alternative, similar to the QDIA protections already required in 401(k) plans. No rule has been finalized yet.

Finance teams that administer 401(k) plans should treat offboarding as a control point, not just an HR step. While fiduciary duties center on prudent plan administration, separation is often where weak communication can lead to avoidable cash-outs and lost retirement assets. A short separation notice explaining rollover options and the risk of defaulting to cash can help. Teams should also confirm that distribution procedures are current and that staff understand how SECURE 2.0 and automatic rollover rules affect small-balance accounts.