Is Your 401k Losing Money? Here’s What You Can Do

A 401k retirement account is one of the most trusted retirement vehicles, opted for by several salaried individuals. Unlike other retirement investments that you invest in or open on your own, a 401k is an employer or company-sponsored plan. This means it is offered to you by your employer. It is not mandatory for employers to provide their employees with a 401k. However, you would find it at most companies. Some states like California, Connecticut, Illinois, Massachusetts, Oregon, and Washington also have mandatory government-sponsored retirement plans. In addition to this, the legislation has been passed in Colorado, Maine, Maryland, New Jersey, New Mexico, Virginia, and Vermont, and the implementation of plans has been scheduled.

Irrespective of whether it is mandatory in your state or not, if your company offers a 401k, it may be in your best interest to invest in it. 401ks accept employee and employer contributions, and if your company contributes to the plan, you can earn and save even more over the investment horizon. Many employers match up to 50% to 100% of the employee contribution. However, there is no fixed rule here. In 2022, the maximum employee contribution to a 401k is capped at $20,500. The employer’s match can be up to $40,500 if the total maximum contribution to the account is $61,000 in the financial year. For employees aged 50 or more, there is an additional catch-up contribution of $6,500. In this case, with the employer’s match, the total contribution cannot exceed $67,500.

401ks invest in a combination of different securities like mutual funds, stocks, target-date funds, etc. Since these are market-linked products, the returns from the account can fluctuate depending on market forces. It is usual for your 401k to oscillate over the term of the investment. However, you may be alarmed if you find your 401k losing money. If you wish to learn about 401ks in detail and how you can maximize your contributions, consult with a professional financial advisor who can advise you on the same. But before you jump to any conclusion, here are some things to know about why your 401k is losing money and what you should do in such a scenario.

Why is my 401k losing money right now?

There can be a number of reasons for your 401k to drop in value. As stated below, market-linked products vary in returns because of the volatile nature of the market. Business cycles like recession or depression, global events, natural disasters, government policies, etc., can impact the market and, consequently, your returns. If you are wondering, “why is my 401k losing money” here are some causes behind it:

1. The volatility of stocks: 

Stocks are volatile and susceptible to highs and lows. Corporate decisions, demand and supply, inflation, investor patterns, market opinion, etc., can impact companies differently. This, in turn, influences the stock prices. Even though stocks are known for their high risk and return, they can go through periods of lows. As per statistics, the U.S. market’s intra-year highs have fallen by 14% on average every year since 1979. However, these were temporary losses, and the market did end with positive highs, estimated at around 83% since then. The takeaway from these trends can be to not take temporary losses to heart or make long-term decisions on the basis of short-term volatility. At present, the stock market is primarily affected by the pandemic and the Ukraine-Russian war. The stress or disappointment is inevitable, but staying put may be the better thing to do if you see your 401k losing money in stocks.

2. Bear market: 

High inflation leading to increased consumer prices, the war in Ukraine, and the resulting disruptions in supply chains, as well as the pandemic and the lockdowns, have all resulted in a disorder in the market. As a result, the fortune of many 401k participants has been affected. In the first quarter of 2022, a study on retirement found that the number of 401k millionaires dropped by 8% to 406,000 compared to 442,000 in the quarter before that.

A bear market can drop your 401k’s value. Since 1979, there have been nine bear markets with an average length of 9 to 10 months. However, the vital thing to remember is that a bull market follows a bear market. The S&P 500 saw an average increase of 25% in the first three months of the bull market in the last five market recoveries. While it may take time to overturn the losses, you can see favorable growth in due time. 

What should I do with my 401k right now in 2022?

The impact of your 401k losing money can be lowered by following specific strategies. Here are some things you can do if you find yourself panicking at the current value of your retirement account:

1. Keep a long-term approach:

Long-term investment can be beneficial to ride out temporary market highs and lows induced by fluctuating factors. Retirement typically requires a long-term plan. It can be years before you get to use your nest egg. If you are saving in your 401k in your 20s, 30s, or even 40s, you still have several years till retirement, provided you retire at the average age of 65. This gives you enough time to build your corpus and overturn the short-term losses incurred along the way. The critical thing to note is that while stocks are the most volatile, they can also offer the highest growth potential. Moreover, they can be suited for long-term investors as they have delivered relatively consistent high returns over a long investment horizon. If you keep a long-term approach, you get the chance to unlock the high return power of stocks and build a considerable retirement savings pool that can be much more valuable than if you invest in conservative options like bonds. So, instead of being deterred by specific triggers that result in your 401k losing money, try to think of the bigger picture and let your investments thrive with time.

Another advantage of investing long-term in a 401k is that you get your employer’s match. A lot of companies provide an employer match subject to the condition that the employee works for a said number of minimum years, such as five, seven, or ten years. If you exit before this, you end up losing the employer’s contribution. So, make sure to stay invested for the long term to get the employer’s contribution.

2. Diversify your 401k portfolio as well as your overall investment portfolio:

Diversification is the key to lower risk induced by volatility. Diversification helps you distribute your investment budget across asset classes, market capitalization, industries, and sectors. This enables you to maximize your profits and minimize risk. For instance, if one asset, such as stocks, performs below your expectations, other asset classes like bonds can offer some stability of returns. Likewise, if you are investing in stocks or mutual funds, you may benefit more if you pick stocks or funds from different sectors and market capitalization. For instance, in the case of shares, if you invest in technology, you can also add consumer goods, pharmaceuticals, artificial intelligence, etc. Similarly, you can add large, mid, and small-cap funds to lower risk if you invest in mutual funds.

401k retirement accounts offer plenty of diversification with options like your company’s stocks, other stocks, bonds, variable annuities, mutual funds, etc. An average plan can give you anywhere between eight and 12 investment choices. So, make sure to make the most of this and invest your money optimally. It may be advisable to consult with your employer on the matter. Some companies automatically assign a portfolio to their employees. This is usually decided as per your current and planned retirement age. However, it may not be customized to your needs. If this happens with you, you can get in touch with your plan’s administrator and get your portfolio altered to suit your individual needs.

Other than your 401k, it is also essential to have a well-diversified investment portfolio. A 401k is only a part of your retirement plan. In order to enjoy a foolproof, comfortable retirement, you would also need other retirement vehicles. So, make sure you have an emergency fund,  mutual funds, individual retirement accounts (IRAs), stocks, bonds, etc., outside your company-sponsored plan. This can help you if you quit your job or stop working altogether. The 401k is linked to your job and may not suffice if you take a sabbatical or switch lanes to entrepreneurship. So, having adequate investments in your overall portfolio is critical. You can hire a financial advisor if you need to create a solid investment portfolio that can stand the test of time even when your 401k is losing money.


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3. Choose age-specific investments to lessen the blow: 

Try to keep age-specific investments in your 401k account to lower the impact of market downturns. Typically, financial advisors recommend investing in a combination of stocks and bonds according to your age. The rule of 100 is a common way to determine this. According to the rule, if you are 30 years old, you can allot 100 – 30 = 70% of your investment portfolio in stocks and the remaining 30% in bonds and other securities. The older you grow, the lower your stock allocation and the higher your percentage in bonds and other securities. This is primarily done to match your reducing risk appetite with age. Your risk appetite is the highest when you are young, as you have a long investment horizon to cover up any losses that you may incur in the market. So, you can invest in stocks. However, the older you grow, the less time you have to retire. This means that a blow to your investments right before you retire will not give you ample time to recover. As a result, your retirement savings can suffer, and you may have to postpone your retirement or take up part-time work in retirement to save more money. So, if you are nearing retirement, you may want to concentrate on bonds over stocks.

4. Continue investing your money:

Panic selling is never the answer. Most investors react to the bear market by selling their stocks. However, this can only worsen the situation. Keeping an unbiased outlook on investing and avoiding decisions based on emotional factors, such as fear, anxiety, uncertainty, or stress, is crucial. The impulse to get out before the prices fall down further can be overwhelming, but as mentioned above, avoiding this urge and planning long-term can be a more sensible thing to do. Remember that a bull market will eventually follow a bear market. So, your investments will likely bounce back. Besides, the bear market can actually work in your favor if you use it to build your stock collection. Buying the dip can be like buying clothes at a sale. When the stock prices drop, you get to buy them at relatively lower prices. So, when the markets rise, your profits are magnified. If you find your 401k losing money, now can be a good time to consider increasing your contributions. If you are not maximizing your contributions already, you can do it now. This can help you buy more stocks or increase your mutual fund units at a low cost. Moreover, the employer’s matching contribution will also increase when you increase your contribution, which is a risk-free and practically cost-free additional investment for you.

To summarize

Instead of worrying over “why is my 401k losing money right now,“it may be better to look at the things you can do to lower the damage and ultimately walk away with a significant nest egg. All market-linked products go through ups and downs, and there may be several ways an investment gets affected. However, keeping a long-term approach and avoiding panic can be one of the best ways to deal with matters. The truth is that the cyclic nature of the market will turn the bear into a bull soon enough. So, waiting it out and letting things be can be a wiser course of action.

Moreover, if you think you are unable to handle the dip, you can always contact a professional financial advisor and get an expert’s opinion to clarify things. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.

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