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Does 401k ever lose money?

A 401k plan is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.

401k plans can be an excellent way to save for retirement since contributions come out of your paycheck automatically. This makes it easy to save without thinking about it. The money you contribute grows tax-deferred over the years, meaning you don’t pay taxes on any capital gains or dividends until you withdraw the money. This gives your investment more time to potentially grow.

However, the money you invest in a 401k isn’t guaranteed. As with any investment, 401k balances can lose value if the stock market declines or investments underperform. So it’s important to understand the risks involved with 401k investing.

Can a 401k lose money?

Yes, it is possible for a 401k account to lose money if the investments held in the account decline in value. A few key points:

– 401k plans are invested in mutual funds, stocks, bonds, ETFs, and other securities. The values of these investments can go up or down.

– When the stock market declines significantly, as it did in 2008-2009, 401k account balances can drop as the value of investments decline.

– Individual investments held in 401k accounts can underperform and lose value, potentially bringing down the total account balance.

– Poor asset allocation and investing too conservatively or aggressively can lead to lost principal in a 401k over time.

– Fees charged on 401k accounts by plan administrators and investment managers can chip away at gains.

So unlike other retirement accounts like defined benefit pensions that guarantee a certain monthly payout, there is risk with a 401k since it is dependent on investment performance. Your 401k balance at retirement could be worth less than the amount you contributed over your career.

What causes a 401k to lose money?

There are a few key reasons why a 401k account may lose money:

Market downturns

Since most 401k money is invested in stocks and bonds, market downturns like recessions can lead to declines in account balances. Stocks tend to experience increased volatility during recessions, leading to falling share prices. Even bonds may fall during economic slowdowns.

For example, in 2008 and early 2009 the stock market experienced a major crash due to the bursting housing bubble and financial crisis. The S&P 500 fell over 50% from October 2007 to March 2009. 401k balances dropped sharply as the value of stocks and mutual funds declined.

Poor performance of individual investments

Even if the overall stock market is doing well, individual stocks and funds held in a 401k can underperform. A stock may decline in value because the underlying company is struggling due to mismanagement, industry changes, or economic conditions. Mutual funds can also underperform their benchmarks, leading to declines.

Having too much money concentrated in one or two poor performing investments can drag down 401k returns. Diversification across asset classes can help mitigate this risk.

High investment fees

401k plans often come with administrative fees charged by the plan provider for recordkeeping, transactions, and access to investment options. The investment funds themselves also charge management fees in the form of expense ratios.

While these fees may seem small, just 1-2% annually, they compound over decades and can eat away at investment returns. Actively managed mutual funds tend to have higher fees that index funds. High fees can slowly deflate 401k account balances.

Incorrect asset allocation

Having the wrong mix of asset classes for your age and risk tolerance can lead to portfolio declines. For example, younger investors may hold too much in bonds and cash instead of stocks. This conservative allocation can lag market returns over the long-run.

On the other side, those nearing retirement should shift some holdings to bonds to reduce risk. But holding too much in stocks close to retirement can lead to larger losses from market downturns.

Getting the allocation wrong exposes the portfolio to more volatility and potential principal loss.

Historical examples of 401k declines

There are a few major historical examples when overall 401k balances declined significantly due to market crashes and recessions:

The dot com bubble – 2000-2002

During the dot com boom of the late 1990s, many investors piled into technology stocks, driving their valuations sky high. Between March 2000 and October 2002, the tech-heavy Nasdaq index fell over 75% as the dot com bubble burst. Many 401k investors experienced losses as overvalued stocks collapsed.

The global financial crisis – 2008-2009

The housing bubble and subprime mortgage crisis led to a banking system meltdown in 2008. This spiraled into a global financial crisis. The S&P 500 plunged 57% during this period as 401k accounts were hit hard. The average 401k balance dropped by more than 25% in 2008.

COVID-19 pandemic – 2020

As the COVID pandemic disrupted economies globally in early 2020, US stocks entered a bear market. The S&P 500 fell 33% between February and March 2020. 401k account balances declined as well, though markets rebounded after aggressive Federal Reserve intervention.

How much can a 401k lose?

While past performance doesn’t necessarily predict future results, historical data shows the potential downside:

– In 2008, the average 401k account lost 25% of value, according to EBRI data. Accounts lost up to 40-50% during the depths of the financial crisis.

– During the dot com crash, the S&P 500 lost about 50% while the tech-heavy Nasdaq lost nearly 80%. Tech-focused 401k accounts likely saw similar or larger declines.

– In general, when broad stock indexes fall 10-20%, it’s considered a market correction. Bear markets see declines of 20% or more which signal economic downturns.

– Individual stocks can also fall 50%, 75%, or even 100% in some cases if a company folds. Diversification helps avoid collapse of an entire 401k if one stock tanks.

– Even bond investments, considered safer than stocks, can lose principal. For example, long duration Treasury bond values dropped over 25% during parts of 2022 as interest rates rose.

– The larger the share of stocks in a 401k compared to bonds and cash, the greater the potential loss during market sell-offs.

So in a worst case scenario, an all-stock 401k portfolio could potentially lose 50% or more during an economic depression or crash. Diversification, asset allocation, and periodic rebalancing help mitigate these risks over the long run.

How long can a 401k stay down?

There is no definitive answer on how long a 401k can underperform or decline since market cycles vary:

– Market corrections in the 10-20% range can last anywhere from weeks to a few months before rebounding. corrections typically precede larger bear markets.

– Bear markets where stocks fall 20% or more have lasted between 10 months to 3+ years in the past. For example, the 2007-2009 bear market period lasted 17 months.

– However, the overall stock market tends to recover eventually, though it can take many years to reach previous peaks after a major crash.

– Individual stocks and funds can lag for extended time periods. A poorly managed mutual fund may severely underperform for many years.

– Some investments like speculative tech stocks can remain far below previous highs for a decade or longer after a bubble bursts.

– The broader the decline, the longer a typical recovery takes. 401k balances after the 2008 crisis took 2-3 years to recover losses. Older workers closer to retirement may not have time to recoup major crashes.

So while downturns happen, staying patient and sticking to a long-term investment plan is key. Timing the ups and downs of the market is very difficult. Maintaining consistent contributions even during declines can help buy at lower valuations.

Will my 401k eventually recover?

If you have a well-diversified 401k portfolio that reflects your risk tolerance and time horizon, it will likely recover from declines if you remain invested through ups and downs.

Some key points on why 401ks tend to recover:

– The US stock market has historically trended upward over decades despite crashes. Given enough time, market gains should offset short-term declines.

– Economic growth drives corporate earnings and stock prices over long periods. US GDP growth has averaged over 3% a year for decades.

– Recessions are often followed by periods of rapid growth. Bear markets give way to new bull markets as stocks rebound.

– Portfolios heavy in bonds and cash provide stability during downturns as stocks recover over years.

– Dollar cost averaging through ongoing contributions lets you buy low when prices fall to eventually benefit from upswings.

– Historically, the longer an investment time horizon, the lower the risk of lifetime losses. Young savers have years to ride out declines.

However, “eventually” may mean years. Older workers with 401ks cannot afford to wait 10+ years for a rebound. That’s why allocation and risk management are key as you near retirement.

How to mitigate risk of 401k losses

While nothing can eliminate the risk of periodic 401k declines given the volatility of stocks, there are ways to help manage and mitigate risk:

Properly diversify your asset allocation

Hold a mix of stocks, bonds, real estate, commodities, and cash based on your age, risk tolerance, and time horizon. Different asset classes often move independently and offset each other during declines.

Rebalance your portfolio over time

Rebalancing means selling assets that grew significantly and buying those that declined to maintain target allocations. This controls risk and sells high while buying low.

Learn about company stock risk

Many employers match contributions with company stock. But holding any single stock introduces idiosyncratic risk. Limit exposure to 10-20% of holdings.

Review investment fees

Minimize fees by using low-cost index funds instead of expensive actively managed funds. Fees eat into returns over decades.

Avoid panic selling during declines

Selling after market declines locks in losses. Stay the course and remain focused on long-term goals instead of short-term volatility.

Consider retirement target date funds

These funds automatically adjust to more conservative allocations as you near retirement. That can limit risk from major losses close to retirement.

Is it ever a good idea to move 401k money during a down market?

In general, it’s not advisable to make major changes and move money out of your 401k plan during a down market. It’s best to stay the course, remain patient, and trust your long-term investment strategy.

However, there are a few cases where certain 401k moves make sense during declines:

– If you lose your job, rolling over your 401k to an IRA gives you more control over investments and avoids cashing out.

– If your plan offers poor fund choices with high fees, a rollover to an IRA opens up better and cheaper options.

– If you are heavily allocated to stocks nearing retirement, moving some to bonds/cash can limit risk.

– Rebalancing your holdings from asset classes that outperformed to those that declined re-sets your target allocation.

– Consolidating old 401ks from past employers into your current plan or IRA simplifies your finances.


– Cashing out your 401k when markets are down. This locks in losses and leads to taxes/penalties.

– Selling stock funds to move entirely into bonds/cash. This may miss out on an eventual rebound.

– Panic selling due to market turbulence. Stick with your long-term strategy.

– Making rash changes to “time” the market turns. This often ends badly.

Should I stop my 401k contributions during a market downturn?

In general, it’s advisable to continue making your regular 401k contributions even during periods when the market is down and your account balance declines. Here’s why continuing contributions makes sense:

– You buy shares at lower valuations while prices are depressed, setting yourself up for gains during the eventual recovery.

– You continue receiving any matching contributions from your employer if they offer a 401k match.

– You maintain the saving habit and work towards your retirement goals. Stopping contributions can jeopardize your plan.

– Consistent contributions take advantage of dollar cost averaging. This lowers your average cost per share over the long run.

– Market timing is very difficult. Stopping contributions could mean missing the eventual bottom and upside.

The key is maintaining a long-term perspective. Periodic declines are normal during decades of saving. Even as your account dips, consistent contributions will continue growing your nest egg over time.

However, if you face extreme circumstances like impending job loss or major medical costs, reducing or stopping 401k contributions temporarily to conserve cash may make sense. But avoid reacting solely based on market volatility.

Should I take money out of my 401k during a downturn?

Withdrawing money from your 401k during a market decline is generally not a good idea. While you may avoid further account decreases, it locks in losses from selling depressed investments. It can also jeopardize your long-term savings plan.

Reasons to avoid 401k withdrawals during downturns:

– You lose future upside when investments eventually recover.

– Withdrawn assets will no longer benefit from potential compound growth.

– You’ll pay income tax on withdrawn amounts. Those under 59 1/2 also pay a 10% early withdrawal penalty.

– Taking money out makes it harder to reach your nest egg target for retirement years.

– Panic selling often locks in losses at market bottoms. Time horizon is more important than short-term volatility.

Rather than withdrawing money if markets decline, first consider:

– Making tactical asset allocation changes to reduce risk if close to retirement.

– Avoiding reacting emotionally. Stick to your long-term investment plan.

– Waiting for the market recovery which history shows eventually happens.

– Contributing even more during declines to maximize dollar cost averaging potential.

If you face an extreme personal financial emergency, taking a 401k loan rather than a withdrawal avoids taxes and penalties. This option makes sense if used judiciously.


401k accounts absolutely can lose money since they are driven by the performance of the stock and bond markets. All investing carries risk, so account balances can decline – especially during major recessions and market crashes.

While past performance doesn’t guarantee future results, historically the stock market recovers from downturns given enough time. Maintaining proper diversification, avoiding panic moves, and sticking to your investment strategy will mitigate risk over the long-run. Dollar cost averaging through consistent contributions also helps take advantage of periodic declines.

So while 401k losses hurt in the short-term, the long-term path to retirement depends on riding out volatility without giving in to fear. Time in the market matters more than market timing. With decades ahead, most younger savers have time to recover from declines before retirement.