MW You could be killing your retirement by neglecting your IRA
By Beth Pinsker
Without auto-investment options, savers can get overwhelmed and become paralyzed
Your IRA accounts need careful tending.
Tending to your 401(k) is like riding in a self-driving electric vehicle, but if you're managing the investments in your IRA, you'd better buckle up, because that is more like driving a manual-transmission sports car.
"If you really know what you're doing, are actively engaged and know how to use the clutch, it's great," said Andy Reed, head of behavioral economics research in Vanguard's investment strategy group. But if conditions don't line up, you'll grind the gears and end up on the side of the road.
Your IRA equivalent of that disconnect is what Vanguard found in new research about how investor behavior differs in IRA accounts versus 401(k) plans, even though people are usually managing both at the same time.
In IRAs, investors are not good at deploying all of their retirement savings - specifically meant for a long time horizon - into stocks and bonds, and they leave a lot of cash on the table. When they do invest, they don't necessarily do it efficiently or with a plan to adjust as they age.
New Vanguard research shared with MarketWatch shows that overall, just 20% of its IRA investors hold target-date funds, in contrast with the 84% who hold those funds in 401(k) plans. Vanguard plans to elaborate on this data in a full report on generational investing later this year.
Not all financial experts are fans of target-date funds, which can have higher fees than index funds and may not be suited to every individual's needs. So the drop-off in usage from 401(k)s to IRAs is not immediately a cause for concern. But in research terms, allocation to target-date funds has become a proxy for investors being on the right path, because these funds are a professionally managed selection of stocks and bonds geared toward a person's retirement date, with the allocations becoming more conservative over time. When workers are auto-enrolled in 401(k) plans, the default investment is usually a target-date fund.
"In terms of retirement planning, there are two types of individuals, which are overconfident investors and status quo investors," said Victor Ricciardi, a visiting finance professor at Skidmore College and co-author of the book "Advanced Introduction to Behavioral Finance."
"Overconfident investors trade too much and are very active decision-makers, since they believe they are above average. Status quo investors are very inactive and many times do not even monitor retirement accounts, because they are very passive and suffer from procrastination," he said. "Both types of investors can be detrimental to retirement wealth by resulting in lower investment returns."
Most 401(k) plans offer a lineup of target-date funds along with a few other options for equity and bond indexes, averaging about 17 choices, according to "How America Saves," Vanguard's annual deep dive into 401(k) investor behavior. Most people make use of about two choices, with 58% investing in a single target-date fund. This is the "set it and forget it" approach.
But with IRAs, the average investor may be doing more forgetting than setting. For those who use a target-date fund, it accounts for 72% of their total IRA balance, suggesting to Vanguard that "it's being used as intended - an 'all in one' solution." But the rest of the balance may be in cash, which is not even keeping pace with inflation these days. And the 80% of investors who are not in target-date funds are certainly heavily in cash - as many as 40% of them, according to previous Vanguard research.
These investors are generally overwhelmed by their choices for investments in the marketplace, and many are unaware that they even have to invest the money in an IRA, mistakenly thinking that the account itself is an investment.
Others, Reed pointed out, think that the money-market account for cash within these accounts is an investment, because it typically has the same kind of letter abbreviation as an exchange-traded fund or mutual fund, such as VMFXX for the Vanguard Federal Money Market Fund.
"Too much choice is bad," Reed said. "All the research shows that. There have been improvements on the 401(k) side to keep it between 15 and 30 choices. But on the IRA side, it's like 15,000 to 30,000 choices."
This is where investing behavior breaks down between 401(k) and IRA accounts. When a worker leaves a job, they can choose to leave their 401(k) where it is, move it to their new workplace plan or roll it into an IRA. Workers can also open an IRA, either traditional or Roth, and contribute yearly. These accounts are not covered by the federal Erisa regulations that carefully govern 401(k)s, nor are they managed in a fiduciary capacity by anyone, unlike a 401(k), which has employer oversight.
"People have no confidence to move the money themselves," said Judy Herbst, executive director of Savvy Ladies, a nonprofit that offers a helpline for financial-literacy questions. Herbst, who also an accredited behavioral finance professional, said questions about IRA investing have been increasing and now outpace 401(k) questions by two-thirds. "Everyone tells them to open up an IRA account or to roll over, but not anything else. So they ask us where to move their money and how to invest it."
How to take the next steps
There are two routes to fixing investor behavior when it comes to IRAs. The harder route is to create some sort of government oversight akin to the way 401(k)s are regulated. This would allow for automatic investments down the road, and also for custodians to be able to steer users toward funds. "We can't make product recommendations right now," Reed said. "All we can do is educate and nudge people if they are sitting in cash."
The other route is to make the investing procedure more user-friendly, so people know there are three steps to handling an IRA - open the account, fund it and invest the money.
"We have discussed things like taking trade instructions at the time of the funding account and more nudge campaigns that remind people they still have a step to go to invest the money," said Reed. So far, Vanguard's efforts on that front have been fruitful. Over the past three years, they have been able to move $9 billion in uninvested cash into the market, helping 160,000 investors save more for their futures, he said. "What we find is that people did not mean to be on the sidelines. They procrastinate, or didn't realize."
On the education side, there's a lot of work to do. One option to make more prominent is in-kind transfers, which would allow investors to move their 401(k) investments directly into an IRA instead of cashing them out and starting from scratch in their rollover account. But this is not available to everyone. Reed said it depends on the share class of the 401(k) investments and whether an identical match is available in an IRA. Often, pricing in 401(k) plans is proprietary.
The women who come to Herbst's group are looking for unbiased advice - real answers from people who are not selling anything. A typical question: "I'm 22 and making $49,000. I'm trying my best to learn how to invest my money, but I get more confused by the day. I have a Roth IRA, brokerage account and 401(k). What should I do?"
"They don't know who to trust," Herbst said. "It's not about accessibility, but about what is trusted and valuable research."
Ricciardi would like to see some kind of compromise, between passive investors just setting automatic investments and overconfident investors trying to do too much on their own. "A non-emotional discipline strategy ... is a solid starting point to reaching your retirement dreams," he said.
In effect: Set it and keep at it.
Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.
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March 20, 2026 14:50 ET (18:50 GMT)
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