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

Generally, the best move you can make when your 401(k) balance drops is to leave your account alone.

Violeta Stoimenova | Getty

While contributing a portion of every paycheck toward your employer-sponsored 401(k) plan is undoubtedly a smart way to save for retirement, it can be quite concerning when you see your balance drop.

First, know that this situation is completely normal. The money in your 401(k) is invested in the market, meaning it's exposed to everyday fluctuations and can both gain and lose value in accordance with stock market performance.

"As investors in mainstream publicly traded equities, you are likely gaining broad exposure through your 401(k) and there will be periods of time where you go through declines, as we have since markets started correcting in late 2021," Austin Winsett, certified public accountant and financial advisor at Exencial Wealth Advisors, tells Select.

Although 401(k) balances can experience drops, the good news is most plans are designed to protect your funds against any large losses. They're also naturally diversified, meaning your 401(k) money is invested in things like mutual funds, index funds, target-date funds and exchange-traded funds versus individual stocks, so your risk is more spread out.

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Here's what to do when your 401(k) is losing money

Generally, the best move to make when you see your 401(k) balance go down is to do nothing at all.

This advice generally echoes investment experts' guidance when any of your investments are affected by market downturns. Investing is a long-term game — you take the short-term dips in exchange for the potential long-term growth, which, history has shown us, is what happens. Though past performance does not predict future performance, historically, any short-term losses have typically been outweighed by larger long-term gains.

"In the long run, stock prices are the world's way of appraising the value of the underlying companies," Winsett explains. "In the short term, prices can be chaotically random but over time, prices are firmly rooted in the real value of real companies whose products and services we use regularly, if not daily."

Making an impulsive move like panic selling your 401(k) investments or withdrawing early from your 401(k) would have serious consequences. If you sell only to later jump back in the market, you may time it incorrectly and miss out on an upswing, or big recovery gains. Staying invested means as the market recovers, so, too, does your account balance. Dipping into your 401(k) funds before reaching the age of 59½, meanwhile, entails a 10% early withdrawal penalty on top of it being taxed.

If you're younger in your career

Your best bet is to leave your 401(k) account alone and continue making contributions as normal. This guidance is even more important for younger 401(k) savers who still have a long way to go before retirement and therefore have time to wait out any market dips — their accounts can recover and bounce back long before they enter their nonworking years.

"For investors who have long runways ahead of them, market declines can provide great opportunities," Winsett points out, suggesting that there are a couple of items younger investors should consider. If you have excess fixed income or cash holdings, it can provide a great opportunity to rebalance capital into equities (i.e. stocks) at discounted prices. Or, if you're contributing to your 401(k) on a regular basis through your paycheck, you may want to consider increasing your contribution rate so more money can be deployed during a market decline.

If you're young and still worried, make sure you know where your 401(k) money is being invested to make sure the risk is something you can afford taking on, as employers will usually automatically assign a 401(k) portfolio based on your age and target retirement date. Remember that you can always consult your 401(k) plan provider for help.

If you want more control over what's in your retirement account consider opening a traditional IRA or Roth IRA. These accounts offer tax benefits but also allow you more choice as to what you're invested in, including individual stocks, bonds, mutual funds, index funds and ETFs. Select ranked Charles Schwab as the best traditional IRA and best Roth IRA.

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    Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

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If you're nearing retirement

For those who are inching closer to their nonworking years and don't have the same timeline in front of them to see their portfolio recover, moving more of your 401(k) money to more stable investments may make the most sense.

"If you're older in age and need to potentially source cash flow from your 401(k) in the foreseeable future, we recommend maintaining at least five years of cash flow need in more stable assets such as fixed income," Winsett says. "This way, when market corrections do occur, ideally you don't have to sell equities at an inopportune time."

Fixed-income investments include government and corporate bonds, CDs (Certificates of Deposit) and money market funds, which are different from money market accounts. These investments are generally low risk, offering a steady stream of income and the promise to pay you interest over time and eventually return your principal upon maturity.

While CDs offer fixed interest rates — meaning your money grows without the risk of your interest rate dropping — they also guarantee a stable return despite the volatility of the stock market. However, keep in mind that you can't access your funds until the CD term ends. Some of the best CDs offer interest rates that are more than double the national average, are FDIC-insured, have zero monthly maintenance fees and low minimum deposits requiring $1,000 or less to open an account. Depending on how close you are to retirement, Select recommends the below:

"We find it critically important that investors maintain a 'war chest' of cash, fixed income or other stable investments so they are not forced to sell to meet their short-term goals," Winsett says.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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