Money Management

Why Your 401(k) Is Losing Money (And How to Stop It)

Why is Your 401K Down
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It’s no surprise that many people are worried about the future of their retirement accounts. Whenever stock or bond prices move to the downside, there’s reason for concern.

In this article, we’ll go over why some people have lost a significant amount of money within their 401(k) and explain what you can do to protect and grow your savings.


Key Points

  • The reasons why retirement account values go down can vary, but it’s important to remember that your 401(k) is a long-term investment account. Short-term fluctuations in the market should not drastically impact your long-term retirement plans.
  • While it can feel like the stock market is taking a nosedive, one tip for calming yourself is to look at your long-term returns. Often, market prices are simply returning to where they were a few months prior. 
  • A few steps you can take include contributing enough to get your full employer match, revisiting your asset allocation, increasing your savings rate, and closely examining your fees.
  • If you dollar cost average into the market (i.e., invest at regular, predetermined intervals regardless of market fluctuations) and have the right asset allocation, you should see your 401(k) balance grow over time. 

How Can a 401(k) Lose Money?

When looking at the markets overall — e.g., the S&P 500 and bond markets — the reasons why prices go down can vary. In 2022, prices declined due to concerns about inflation, rising internet rates, and the Russian invasion of Ukraine. In 2008, the market crashed as a result of a burst housing bubble.

In any case, it’s important to remember that your 401(k) is a long-term investment account. That’s true for even those nearing retirement, because it’s not as if you’ll need the entire balance of your 401(k) on the day you retire.

Furthermore, there will almost certainly be several events over the course of your life that will cause the market to drop significantly. 

It’s best to think of these events as the price you have to pay for the superior returns that you’ll get for holding your investments. After all, the alternative is leaving your assets in cash and watching inflation outpace the small gains you’ll see.

Is Your 401(k) Losing Money?

There’s a very good chance your 401(k) has gone down in 2022. But that does not necessarily mean that you’ve lost money.

While it feels like the stock market is taking a nosedive, the chart below shows that it’s just returning to where it was at the start of 2021.

The stock market, as measured by the S&P 500, has come back down from all-time highs. But at the valuation shown in the chart above, it has returned to where it was a little more than a year earlier. More importantly, it's still up significantly over the charted five-year period.
The stock market, as measured by the S&P 500, has come back down from all-time highs. But at the valuation shown in the chart above, it has returned to where it was a little more than a year earlier. More importantly, it’s still up significantly over the charted five-year period.

Here’s an important fact: you didn’t make money when prices were inflated (if you didn’t sell at the top), and you didn’t lose money when the market came back down (as long as you didn’t sell at the bottom).

The big mistake some investors make is investing more money when stock prices are high, then selling low when everyone is panicking. 

This is referred to as market timing, and an exhaustive list of studies (see a recent one here) has confirmed that even professional investors who try to time the market don’t perform as well as those who just buy and hold. 

What’s interesting is that this underperformance has been observed in both good and bad markets.

The study referenced above found that in 2020, when prices were falling due to the COVID-19 pandemic, professional equity managers averaged a return 1.11% lower than the market provided. In 2021, as prices shot up, professional managers underperformed the market by 2.11%.

If you’re investing for the long-term, you shouldn’t worry about day-to-day or even month-to-month changes, nor should you concern yourself with trying to time the market. Focusing on saving regularly and investing the right way for retirement is far more important. 

What You Can Do When Your 401(k) Drops In Value 

While it’s impossible to predict the market’s future, there are some basic steps you can take when the value of your 401(k) has dropped. 

#1. Make Sure to Take Full Advantage of Your 401(k) Match

If you’re not taking full advantage of your employer’s 401(k) match, you’re leaving money on the table. 

For example, if your company offers a 50% match on the first 6% you contribute, you should be contributing at least 6% of your salary. 

Depending on your goals, you may want to contribute more. 

I often recommend starting with a 1% increase in your contribution rate and aiming to increase it again at regular intervals. If you were to increase your savings rate by 1% every six months, in five years, you’d have increased your savings rate by 10%. 

Ideally, your salary would have gone up by then as well.

Nonetheless, you should ensure that you’re at least taking full advantage of your employer match.

#2. Revisit Your Asset Allocation

If you’re up at night thinking about your 401(k) balance going down, it’s a sign that your asset allocation may be too aggressive. Go back and review your asset allocation to make sure it aligns with your risk tolerance and goals.

I recommend using Personal Capital’s free tools, which allow you to compare your current portfolio allocation to an ideal target allocation. Often, investors can decrease their risk without sacrificing expected returns just by optimizing their asset allocation.

One silver lining of higher interest rates is that future bond yields are expected to increase. While many people eliminate bonds from their portfolio during low interest rate environments (such as the one that has existed since 2008), investors can expect higher yields from the non-equity portion of their portfolio going forward (and therefore, not take on as much risk). 

This is good news for more conservative investors, as bond prices have been more stable than equities over time.

#3. Examine the Fees You’re Paying

One of the silent killers of 401(k) balances is excessive fees. While 1% annually may not sound like much, think of it as follows:

Let’s say your 401(k) has an average annual return of 8%, with inflation averaging out at 4%. 

That leaves you with just 4% in real returns. If you were to give up 1% to fees, that amounts to 25% of your returns!

Worse, the fees in your 401(k) are often hidden. Personal Capital has a fee analyzer that lets you uncover your real fees.

If you have multiple 401(k)s from previous employers, the right decision is often rolling your old accounts into an IRA. This provides you with complete control over the investments you have available and the costs you pay. 

There are a few reasons why you would not want to roll over, but more often than not, you’ll save on both fees and have better investment options. 

Why Your 401(k) Is Losing Money: Final Thoughts

When looking back at the 2008 market collapse and the ensuing recession, the people who came out ahead a decade later were the ones who:

  • Stayed the course, continuing to dollar cost average into the market through the downturn.
  • Reviewed their asset allocation and rebalanced if necessary.
  • Minimized fees and expenses.

Don’t make the mistake of pulling out of the market when things are seemingly at their worst. While you may have to rebalance, adjusting your asset allocation to something more risk-appropriate, being a disciplined investor and following the steps above can help ensure you’ll retire comfortably.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.
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