Whether you need to channel your 401(k) questions through your benefits manager or go directly to your investment plan manager, getting your retirement plan straight right now should be a priority for any plan participant.
After all, the stakes have rarely been higher.
Case in point - the Russell 3000 index, which tracks the overall performance of the U.S. stock market – was down 25% through early April, before rebounding along with U.S. stocks through mid-April.
Twenty-five percent is a big number in dollar figures, as it accounts for a loss of $3.8 trillion in 401(k) plans throughout the U.S.
Those are numbers that get the attention of Main Street 401(k) investors when they check their retirement plans. But once the shock wears off its time to roll out a battle plan that protects your retirement assets in the age of COVID-19.
That plan starts with some candid questions that 401(k) investors should ask their plan managers before they make any changes – if at all – with their retirement portfolios. When you get to that stage of the game, ask these questions first:
1. Should I Be a Major Seller Right Now?
Most money managers advocate the same approach medical experts have touted during the coronavirus crisis – keep calm and carry on. Studies show that long-term investors who take money out of retirement funds during a big market dip (and this one certainly qualifies) miss the inevitable upswing that all equity markets experience after a major market decline.
Your best move? Unless you’re a year or so away from retirement and your 401(k) plan is hemorrhaging cash (in which case an immediate conversation with your plan manager or financial adviser is mandatory), take a “buy and hold” strategy where you stay put, and ride the crisis out. It really is your best chance to keep your retirement savings plan on track.
2. Should I Stop Pouring Cash Into My 401(k) Plan?
Once again, the answer here is “no” and here’s why – with a caveat or two.
Assuming you’re safely employed and you have enough savings to live on, keeping 401(k) plan contributions flowing into your account is a good idea. Number one, it enables your assets to grow with more cash in your account.
Plus, chances are your employer offers a 401(k) plan contribution match (more on that below) and you’ll want to take full advantage of that matching contribution.
When you combine your own 401(k) contribution with your employer’s matching contribution, you really are getting the best of both worlds in maximizing your 401(k)'s performance, especially if the financial markets continue to edge up in April.
Now to the caveats. If you’ve been sidelined, furloughed or even laid off and you really need the money, your household financial needs come first. In that instance, and if you have no emergency savings, cutting off your 401(k) plan contributions for a while may not be a luxury.
It may be a necessity.
3. Should I Get More Aggressive With My 401(k) Plan Contributions?
On the other side of the coin, there’s some merit to the strategy of rushing into market chaos when others are rushing out. That’s because when markets plummet, stock prices decline significantly – even with quality companies that would otherwise be good, stable choices for any long-term savings plan.
Market mavens have long said that buying when others are selling and selling when others are buying is the optimal strategy with any profit-minded investor. Consequently, if you have room to max out on your 401(k) plan contributions (contribution limits are $19,500, and for those 50 and over, $26,000 in 2020) getting more aggressive as the financial markets are in general decline makes a great deal of sense.
Check with your plan administrator and see how much more you can contribute to your 401(k) this year. Then, talk things out with your financial planner or 401(k) plan manager and see what risks and what rewards are in play for your unique retirement savings plan needs.
If you can afford to do so, chances are you’ll get a “green light” to ramp up your 401(k) contributions.
4. Should I Take an Emergency Loan Out of My 401(k) Right Now?
While Congress, via the CARES Act signed into law in late March, has eased 401(k) borrowing rules, does that mean you should do so?
It’s a tough call and is largely dependent on your unique personal financial situation.
First, let’s take a look at 401(k) borrowing rules changes and how they might impact 401(k) savers.
Under the CARES Act, 401(k) plan participants can borrow up to $100,000 without the 10% Internal Revenue Service withdrawal penalty that normally applies to those under age 59½.
With the COVID-19 crisis looming overhead, 401(k) plan savers would have three years to pay the money back. If not, they’ll be liable for further IRS penalties and also miss out on any portfolio gains the loan money would have contributed to if the loan was never taken.
(Economists call those types of financial losses “opportunity costs”, as money removed from an investing asset equals profit lost by not being included in the investment equation.)
It’s also worth noting that money taken out of a 401(k) account in the form of a loan is still considered taxable by the IRS, which might factor into any 401(k) loan decision.
Past those structural rules and adjustments, any decision to borrow cash from a 401(k) should be weighed against any crushing financial needs.
For example, if your personal financial situation leaves you in dire straits, and you can’t pay your mortgage or auto loan, for example, a 401(k) loan can bridge the gap until your money situation stabilizes.
Largely though, borrowing from an income-producing asset like a 401(k) is considered as a “last resort” by money managers. It’s better, many say, to take a personal loan, a family loan, or other hardship loans rather than raid a 401(k) plan.
Aside from the fact you’ll have to pay the money back, you’ll lose the financial momentum you’ve gained from having the cash in your 401(k) account working for you and building up retirement assets in the process.
After all, once you take the money out, you can never get the profit back you would have made if you left your 401(k) plan intact in the first place.
5. I’ve Just Been Laid Off – What Do I Do With My 401(k) Right Now?
Losing your job is hard enough without making tough decisions on your 401(k) plan.
The fact is, however, you’ll need to take quick action with your 401(k) plan and your employer should play a major role in how you manage those post-job retirement plan steps.
Until you find work with another employer or go the self-employed route, keep your 401(k) cash right where it is right now.
That means not taking out a 401(k) loan unless you absolutely have to (see above) and keeping your 401(k) cash working for you. Data from the Great Recession of 2008-09 showed that laid-off workers who kept their 401(k) accounts intact enjoyed greater growth than workers who did the opposite.
When you do find a new job, you can rollover your 401(k) from your old company into your new one, with no cost to you and with your plan administrator handling the switch.
If your new company does not have a 401(k) plan (and most companies do) you can roll your old 401(k) proceeds into an individual retirement account, instead.
That way, you can keep your retirement on track and your investment plan money working for you — even amidst a once-in-a-lifetime pandemic.