Why is My 401(k) Losing So Much Money?

401(k)s can lose money when the market falls, as their investments rely heavily on stocks; but over long periods of time these accounts have seen growth.

Watching your 401(k) balance drop can be disconcerting, but try to remain calm and remember this is just temporary.

Fees

As pensions become less widespread, more people rely on employer-sponsored retirement accounts like 401(k) plans as sources of their retirement income. Unfortunately, such plans often come with fees that add up over time.

Administrative fees cover costs associated with account statements, education materials and customer service representatives as well as costs related to online access to investments and advice – often charged per participant or as a percentage of plan assets invested.

Investors may be unaware of these fees, which are sometimes hidden within a fund’s expense ratio. With new regulations mandating greater fee transparency, it should now be easier for you to see exactly how much money is going toward investment fees.

Fees can have a devastating impact on retirement savings over time. According to NerdWallet, a retiree saving $10,000 annually for 35 years with returns of 7% could lose $227k due to just one additional fee – the equivalent of nearly halving their investment balance!

Market Volatility

Market volatility is an inevitable part of investing, and can actually help your retirement account flourish. But watching your balance decline could cause anxiety or spur impulsive decisions that compromise long-term returns.

Robert Shiller notes that market volatility can be caused by many factors, including changes to popular models that influence investor behavior. Economic data like monthly jobs reports, consumer spending data and quarterly GDP reports also impact markets – when they fail to meet expectations stocks can often decline precipitously.

Specific events, like natural disasters or new government regulations, can also cause market instability within an industry and sector, including compliance costs that drive up operating expenses for companies and lower their stock price.

Short-Term Gains

Capital gains taxes are assessed when selling investments or assets for more than their cost basis, with tax payments depending on both your IRS tax bracket and how long the asset was held; short-term gains typically incur ordinary income rates while longer-term ones often incur lower capital gains rates.

Acknowledging gains and losses at the right time is particularly crucial during retirement when expenses tend to be much less. Harvesting short-term losses before recognizing long-term gains can reduce your overall tax bill significantly.

Utilizing tax-efficient retirement accounts such as IRAs and 401(k)s is another effective way to minimize capital gains tax liability. Withdrawals from such retirement accounts typically count as ordinary income and therefore won’t incur the higher capital gains tax rates, instead being taxed at your personal income tax rates instead.

Long-Term Losses

Tax-advantaged accounts like 401(k), traditional or Roth IRAs, SEP or solo IRAs allow investors to grow their investments with tax deferral in mind – you only pay taxes on capital gains when selling assets and any losses can be deducted up to $3,000 (or $1,500 if filing separately) against wages, retirement income or any other ordinary sources of income; but certain rules must be followed when allocating losses across different assets; in general long-term losses should first offset long-term gains while short-term losses should offset any remaining gains that remain.


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