Is this investment snafu hurting your IRA?

With the April contribution deadline approaching, Individual Retirement Account holders could be missing out on some valuable investment gains and future retirement income if a new trend uncovered by Vanguard continues.

Vanguard, the Valley Forge, Pa.-based investment management company, says that more than two-thirds of its 3.5 million IRA investors forgot to move their money out of money market funds after parking those funds in order to meet the spring contribution cut-off date.

“What seems like a prudent temporary decision can become an ill-advised longer-term investment choice,” the company notes.

With more than 40% of U.S. households holding IRAs, which equates to over $5 trillion in retirement assets according to Investment Company Institute data, IRAs have become a vehicle for individuals to bank on retirement savings and its tax advantages.

Between 2007 through 2013, Vanguard says that IRA investors rushed to pay their account contribution during the January and April “tax season” period, which influenced deposits into the lower returning money market funds, an open-end mutual fund vehicle that provides exposure to U.S. Treasury bills. This push, for more than 66% of the population studied, became a four-month long oversight.

“We do think that primary reason we are seeing these trends is the decoupling of the contribution of the tax filing deadlines, the default is the money market or the mental default is the money market,” says Maria Bruno, a senior investment analyst at Vanguard.

Her company’s research suggests IRA investors should mirror what 401(k) plan sponsors are doing and make balanced funds, such as target-date funds, the default option for participants.

Overall, target date funds have seen an uptick among 401(k) plan participants, according to information released in December 2013 from the ICI and the Employee Benefit Research Institute. At year-end 2012, 41% of 401(k) participants held target date funds, which was a three percentage point increase.

These vehicles are seen to help the longer-term nature of retirement accounts achieve goals of continued income over the years.

Attempting to inform plan sponsors and individuals in the IRA market, Bruno says there is an “opportunity to educate investors” to take on the more balanced, diversified and less costly target-date options. The investment company managed about $2.45 trillion in U.S. mutual fund assets at the close of 2013. It also provides investments to about 4,000 defined contribution plans and over 3.5 million participants. 

“When you think of money market fund and what we believe at Vanguard is that should be for short-term goals, liquidity or near-term goals,” explains Bruno. “When you think of money market funds, in terms of asset allocation and a longer term goal, you have principle stability, but you’re not keeping up with inflation. So it’s a big risk, you may be giving up risk, but what you’re exposing yourself to is inflation risk for longer horizon goals.”