Managing Employer-Sponsored Retirement Accounts in a Market Decline

When market conditions are unstable, it’s only natural to worry about your employer-sponsored retirement account. How will your 401(k) be managed in a market decline? What do you as the account holder need to do to protect your investments?

Read on for a few key steps to help you manage your employer-sponsored retirement account during a market decline—plus a few things to avoid.

DO Check In With Your Employer

Many employees are aware that some of their paycheck is going into a 401(k) account, but they don’t really understand who is managing these funds and where their money is being invested. If you’ve previously taken a backseat role in the management of your employer-sponsored retirement account, now is the time to get involved!

Check in with your employer and get all the details you can about how your funds are managed. Which investment firm is responsible for your portfolio? Is your money invested in high-risk stocks, or low-risk CDs? Perhaps most importantly, will your portfolio shift to lower risk investments as you get older to ensure that if the market declines, your retirement savings are protected from risk? Having all of this information will give you a solid foundation to decide what to do next.

DON’T Panic and Withdraw All Your Money

A market decline is scary, but investment experts almost always say that one of the worst things you can do for your retirement fund is to panic and withdraw all your money. Taking your money out during a market decline means a definite loss, whereas leaving your money where it is gives you the opportunity to regrow your capital and continue to profit from your investments.

If you are concerned about the risk level of your current 401(k) investments, do some research about lower risk options such as fixed index annuities which provide a guaranteed stream of income for retirement—meaning you won’t lose money, even if the market continues to decline. Still, choosing a lower risk investment usually means giving up potential capital growth, so be sure to speak with a wealth management or retirement expert before withdrawing funds.

DO Make a Timeline

As you consider how to act when stock indexes are in decline, it’s essential to have a retirement timeline. How you react to market conditions will vary drastically depending on when you plan to begin withdrawing money from your employer-sponsored retirement account.

If the market is in a decline but you’re not planning to retire for 20 or 30 years, it’s usually a smart idea to simply keep your money where it is. Over time, the stock market trends upwards. On the other hand, if retirement is just around the corner, you may need to act more strategically—considering lower risk investments or working out a plan to live on alternative savings until the market picks up.

DON’T Ignore the Penalties

All 401(k) plans are subject to a 10% penalty for early withdrawals, meaning that if you move your money before age 59½, you’re required to pay 10% of the money withdrawn to the IRS.

The good news is that there are some exceptions to early withdrawal penalties on employer-sponsored retirement plans. For example, if you become disabled, give birth to or adopt a child, or need to pay for COVID-related expenses, you can withdraw some money from your 401(k) without the additional penalty. Other hardship withdrawal exceptions include medical bills for yourself or your dependents, money to avoid foreclosure on your home, or funeral expenses.

While none of the penalty exceptions are directly related to a market decline, it’s possible that one or more of the circumstances could apply to your current situation.

DO Think Long Term

As life expectancy continues to increase, many people end up needing their 401(k) savings to last longer. A good strategy for retirement planning is to not rely on a 401(k) account alone. Instead, aim to have a combination of a 401(k), a personal retirement account (IRA or Roth IRA), and a typical savings account through your credit union or bank. Then, in times when the market is in decline, you can pay your bills from the traditional savings account, without emptying your investment accounts and taking a capital loss.