What to Do If Your 401(k) is Losing Money

Building a strong retirement nest egg doesn’t happen overnight. It’s usually a long game that takes patience and years of investing. Along the way, you’ll likely experience bouts of market volatility, which can push your 401(k) balance up and down.

A fluctuating account balance is completely normal, though dips can be a bit more concerning if you’re nearing retirement. Though market swings come with the territory, there are ways to navigate downturns and position yourself for long-term growth rather than selling holdings at a loss and robbing yourself of future returns.

We’ll dig a bit more into why these market swings happen and why your response (or lack of response) is so important. We’ll also give you some things to try if your 401(k) is losing money.

Why is my 401(k) losing money?

Your 401(k) is an employer-sponsored account that allows you to make pre-tax contributions. (Your employer may even match some or all of your contributions.) Money you contribute to your 401(k) is then invested, allowing you to take advantage of compound interest and grow your savings even more.

401(k)s may allow you to invest in:

• Stocks

• Bonds

• Mutual funds

• Index funds

• Exchange-traded funds (ETFs)

At least a portion of your 401(k) is likely exposed to the stock market, which is what helps it to grow over time. However, like with all investments, if the stock market dips—you could instead see declines in value from time to time, which may lower your 401(k) balance at certain points along your savings journey.

What causes stock market fluctuations?

There are many factors that can cause stock market disruptions , including:

• Political developments and elections

• Economic factors like unemployment, inflation or a recession

• Industry-specific trends

How long does it take the market to recover from a downturn?

It’s impossible to predict future market dips, but things can turn around relatively quickly. At the start of the COVID-19 pandemic in March 2020, the S&P 500 quickly fell 34 percent—but the market had recovered by August and eventually went on to reach new highs (though this was record time). Though it can take longer or shorter for the market to correct, nearly half of all corrections or recessions breakeven in eight months or less.

What to do if your 401(k) is losing money

While it’s easy to think that you’re “losing money” when the value of your investments declines, the reality is that you haven’t lost any money. That’s because you still have the same investments, which can increase in value in the future. The only way you lose money is if you sell your investments when they have lost value.

Don’t “panic sell” your investments

While it may be tempting to “cut your losses” and run, doing so means you won’t be able to take advantage of potential future returns. The stock market historically has bounced back from short-term declines, so pulling your investments could mean missing out on some of the market’s best days. Staying invested is usually safer than trying to time the market. Selling is how you realize losses in your account. And whenever the market takes a hit, remember that retirement saving is a long-term strategy.

If you’re looking to retire in the short term and you’re concerned about a market downturn, reach out to your financial advisor before taking any action.

Figure out why your 401(k) is losing money

If you're asking yourself, “Why am I losing so much money in my 401(k)?”, take a closer look at your investments. You may find that a lack of diversification is responsible for your declining account value.

Diversification is about spreading out risk and holding a mix of securities from different sectors and asset classes. If your 401(k)’s investments are diversified, gains in one part of your 401(k) could make up for losses in another.

Your financial advisor can look at what investments you have and make recommendations to better diversify your portfolio.

Diversify your retirement savings

Diversification extends beyond your investment portfolio. Look at diversifying your retirement savings and future sources of retirement income to shield against major market downturns (and take advantage of the different tax benefits of different financial options).

Depending on your situation, your financial advisor may recommend that you also open a Roth account or traditional IRA, purchase an annuity, leverage cash value that’s accumulating in a whole life insurance policy¹ or adjust your Social Security claiming strategy.

Consider your retirement timeline and adjust your risk tolerance

Younger investors have more time to rebound from dips in their 401(k) and continue growing their nest eggs. If you’re on the home stretch to retirement (or already there), you might feel short-term market dips more than someone who’s decades away.

How you respond to a declining 401(k) balance will depend on where you are in your journey. If you’re further from retirement, your advisor may recommend you wait it out and give your money time to grow. If you’re nearing or in retirement, you should make sure that your investments are positioned for your retirement plan.

How can I protect my retirement savings from market downturns?

No one can ever fully predict the beginning or end of a market downturn. Investing always comes with risk—and trying to time the market can backfire. But here are some strategies you might try to lessen the impact of market downturns:

Stick to the plan

Even during market downturns, sticking to your investment plan and staying diversified is seen as the best way to invest. It can be tempting to make moves as the market dips, but if you’re not retiring soon, it’s usually best to stay put. If you are nearing retirement, consult your financial advisor before making any moves. A good financial plan is designed to weather unexpected turns, so chances are your advisor already has a good plan of action in mind.

Diversify

Your financial plan should include a mix of low- and high-risk investments, giving you diverse exposure to the market and keeping your portfolio balanced. Your advisor can help you select investments based on your age and risk tolerance, then adjust your approach as you get closer to retirement.

You may also want to include some investments that “auto-diversify” for you, like target-date funds or index funds and work in some low-risk, reliable investments like certificates of deposit (CDs) or government bonds.

If your 401(k) is your only retirement savings option, you may also work with your advisor on adding additional savings options. Doing so can further diversify your financial plan and allow you to take advantage of additional benefits, maximizing what you’ve saved.

Stay close with your financial advisor

Your advisor will help you keep your eye on the end goal—regardless of what happens in the markets. A good financial plan will be prepared to adapt to potential risks, so if you stick to it, you should still be able to reach all your financial goals.

However, if you are feeling worried about your retirement savings, give your financial advisor a call. They can answer any questions you have and help you see the bigger picture—giving you peace of mind that the money you worked hard for will be there when you need it.

All investments carry some level of risk, including loss of principal invested. Neither diversification or other investment strategy can guarantee a profit or protect against loss.

¹Utilizing the accumulated value through policy loans, surrenders or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.