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401(k) Losing Money: What To Do & How To Stop It

Last updated 03/15/2024 by

Lacey Stark

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If you notice your 401(k) losing money, it’s important not to panic and withdraw money prematurely. It’s completely normal to see the market decline where you temporarily lose money. But historically the stock market tends to regain its losses over time, so some fluctuations shouldn’t be a major concern. However, if you’re worried about stock market volatility or have a low risk tolerance, there are a few things you can do to mitigate risk and help your retirement savings remain stable.
If you’re fortunate, your company offers a 401(k) plan to help you save for retirement. Even better, they offer matching contributions that will help you grow your retirement savings more quickly. Typically these types of retirement accounts have some mix of stocks, bonds, mutual funds, index funds, and other kinds of investment products.
However, these kinds of accounts are also typically vulnerable to the stock market’s ups and downs. Which is (usually) nothing to be concerned about. After all, the average length of a bear market is much shorter than a bull market, and your retirement accounts should bounce back right along with the stock market.
But it can still be disconcerting to watch the value of your investments go down as the market declines. Read on to learn about four different ways to better protect your retirement assets from market losses and options for more stable investments if you think it’s time to make some changes in your investment portfolio.

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1. Sit tight

As you watch your 401(k) lose money, it can be tempting to take action before all the money you’ve invested is gone. But if you’re relatively young, and you’ve got a well-diversified investment portfolio, your best bet is to just continue making contributions, leave your 401(k) alone, and ride out the market decline.
Oftentimes there are just short-term dips that cause temporary declines, and those should be no cause for concern. You may not even notice small dips if you don’t constantly monitor your retirement account. But over the decades it takes to build your retirement savings, you’ll run into a bear market or two over the years, which can feel a bit more alarming.
Still, you shouldn’t panic and think about withdrawing money from your 401(k). For one thing, the penalties for early withdrawal (before age 59½) from a retirement plan are steep. Also, if you take your money out early, you won’t have the chance to recover those lost funds when the market rebounds.
Financial advisors and historical market data will tell you that stock market prices always go back up, and you’re better off leaving your retirement accounts alone during bear markets.

2. Check 401(k) for investment diversity

On the other hand, if you believe your 401(k) is losing money disproportionately to overall market losses, you may want to take the time to see if your retirement portfolio is well diversified. Having a well-balanced portfolio of both riskier and more stable investments is one of the best ways to weather a market decline.
For example, if you own just a few individual stocks and stock prices drop dramatically, you’ll lose a lot of money very quickly. But, if you don’t put all of your eggs in one basket, you’re much better equipped to handle economic downturns.
A solid balance of stocks, bonds, and index funds such as mutual funds or ETFs (exchange-traded funds) is a good way to safeguard your portfolio from market fluctuations.
You also want to make sure your investment strategy is not too focused on any one industry or asset class. If all of your investments are in the tech sector, for instance, and that industry has some major disruptions, you might find yourself losing more money than you can recover easily.
Non-cyclical stocks, also called defensive stocks, are another strategy investors can employ for further diversification. Examples include utilities, food and beverage, and non-durable consumer goods. Because these stocks represent day-to-day necessities, they are less vulnerable to economic downturns.

3. Fixed-income investments

If you’re closer to retirement age, a fixed-income approach to investing isn’t a bad idea. This style of investing is focused on preserving capital and income, and thus involves less risk and more control than investing in the stock market, for instance. Of course, the lower the risk, the lower the returns
Fixed-income investments include securities such as treasury bonds and bills, corporate and government bonds or bond funds, and certificates of deposit (CDs). You might also consider fixed-index annuities, which can also safeguard your money against market dips.
If you’re decades away from retirement, relatively low-return investment products such as these shouldn’t be your main focus. But for older people or those with a very low risk tolerance, fixed-income investing is a solid way to preserve your capital and make a modest income.
As we just mentioned, CDs are great low-risk investment vehicles for the right investor. However, to ensure you have the best interest rates possible, you might want to compare your available options before purchasing one.

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4. Target date funds

If you don’t feel qualified to manage your 401(k) on your own, talk to a financial advisor or your brokerage firm about a target date fund. This type of investing strategy — also known as a lifecycle fund or age-based fund — is meant to rebalance your portfolio as you get closer to retirement age.
Typically, target date funds will start younger investors on a plan that mainly consists of stocks, but gradually over time will transition to fewer stocks and more conservative fixed-income assets such as bonds and CDs.
The benefit of target date funds is it takes the guesswork out of choosing how to rebalance your retirement account over the years. As you get older, you may want to be more heavily invested in securities that won’t lose money but still pay a steady interest income.

Pro Tip

If you think that a lack of diversification is the reason for the decline in your 401(k), talk to your plan’s custodian, a financial advisor, or an investment advisor about the best ways to diversify your portfolio and protect your hard-earned dollars.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Why is my 401k losing money right now?

There are a number of reasons why your 401(k) could be losing value right now. It could be the economy is in a temporary downturn, or maybe your individual stocks lost a lot of ground recently. It’s also possible that you’ve lost money in your 401(k) due to high fees. If this is the case, you might want to look into changing your plan or rolling it over into an individual retirement account (IRA).

What happens if I decide to take my money out of my 401(k)?

First of all, if your 401(k) is losing value, withdrawing money from it isn’t the correct response, as that money is meant to be saved for when you retire. Also, in the long run, you’ll end up costing yourself even more money through income taxes on early withdrawals plus a 10% penalty, unless you meet certain qualifications.
An alternative to actually withdrawing money from your 401(k), and incurring taxes and penalties, is to sell off some of your investments but leave that money in your 401(k) plan’s core (or cash) position. You can then reinvest that money later when the market seems more stable.
IMPORTANT! Keep in mind that while that money is safer now, if those assets you’ve sold rebound, you might not be quick enough to take advantage of the upswing. This means you could lose out on potential earnings.

Can you lose all your money in a 401(k) if the stock market crashes?

It is theoretically possible to lose the total value of your retirement account if the stock market crashes, but it’s pretty unusual. As long as you make sure that your plan is diversified, you should never have to worry about losing all your money. And never forget that 401(k) plans are meant for retirement savings in the long run, not for short-term gains, so temporary dips are nothing to be alarmed about.

Can you ever lose your 401(k) in a divorce?

In the event of a divorce or legal separation, it is possible to lose all or part of your 401(k) as part of the divorce settlement. In most cases, however, you’ll probably be required to split the retirement account 50/50 with your ex, especially if they don’t have one of their own. An alternative to breaking up your retirement account could be to offer other marital assets of similar value in lieu of the retirement funds.

Key Takeaways

  • Short-term losses should not be a concern for those who are invested for larger long-term gains. Historically, the stock market always comes back.
  • In most cases, financial advisors recommend you continue making contributions to your 401(k) and wait out market declines.
  • Especially when you’re young and building your retirement savings for the future, be sure to carry a well-diversified balance of assets.
  • If you’re worried about recent drops in the stock market — or if it’s entered a bear market — you can move to a more conservative investment style such as purchasing fixed-interest securities.
  • Withdrawing money from your 401(k) early is rarely a smart idea because of the heavy penalties and taxes you’ll incur.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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