A sharp stock market selloff on Thursday, 5 November, sent major indexes tumbling and left many Americans checking their 401(k) balances with unease. The Dow Jones Industrial Average plunged 1,833 points, or 3.44 percent, while the Nasdaq Composite sank 5.52 percent and entered correction territory. The S&P 500 dropped 4.36 percent as technology and semiconductor stocks suffered heavy losses.
The steep declines could weigh on 401(k) balances, particularly for savers heavily invested in stocks. The impact depends on how retirement savings are allocated and how close a worker is to retirement. Financial advisers who spoke to Fox Business warned against making emotional investment decisions in response to a single day of losses.
“Market declines can be unsettling, particularly for Americans approaching retirement, but the biggest risk is often not the decline itself. It’s making an emotional decision in response to it,” said Mark J. White, a wealth advisor with Mark White Wealth Advisors.
What a 401(k) drop means at different ages
For younger workers, a falling market changes the maths of a 401(k). Regular contributions buy more shares when prices are lower, so money paid in during a downturn purchases a larger stake. White said that for younger Americans, continuing regular 401(k) contributions during a downturn can work in their favour by allowing them to purchase investments at lower prices.
That logic only holds for savers with time on their side. The same drop looks very different for someone planning to retire within a few years, because there is less time to make up the ground.
Jay Duffy, co-founder and managing partner at Frame Wealth, told Fox Business the greater concern is for Americans nearing retirement whose portfolios may not be designed to withstand a major market decline. “The investors I worry about aren’t the 35-year-olds. It’s the 62-year-olds who are three years away from retirement, sitting in portfolios that were built for someone with another 20 years to recover,” he said.
Why advisers warn against selling a 401(k) in a rout
Duffy warned that retirees who must sell investments during a downturn to cover living expenses face what financial planners call sequence-of-returns risk, which can accelerate the depletion of retirement savings. Selling shares to pay bills while prices are low locks in the loss and leaves fewer shares to benefit from any recovery.
That risk is highest for savers who hold almost everything in stocks close to retirement. Advisers generally recommend that savers near retirement hold a larger share of bonds and cash, so living expenses can be met without selling shares at low prices.
The selloff was driven by concerns about potential new artificial intelligence regulations after Democrats swept the midterm elections on Tuesday. The Nasdaq closed at least 10 percent below its record close on 6 October.
For most savers, the damage is paper loss rather than realised loss, and it only becomes permanent if shares are sold. That is why advisers keep returning to the same advice after sharp falls: check the allocation, make sure the mix of stocks and bonds fits the time left until retirement, and avoid sudden moves made in the heat of the day.
What to check in your 401(k) after the selloff
The first check is the allocation itself. A 401(k) statement shows how much sits in United States stock funds, international funds, bonds and cash. A saver years from retirement can usually carry a higher share of stocks. A saver within five years of retirement needs enough in bonds and cash to cover several years of withdrawals without touching shares.
The second check is the contribution rate. Pausing contributions during a downturn removes the chance to buy at lower prices, and restarting later means missing the cheapest shares. White’s advice to younger savers was to keep contributing through the drop.
The third check is the fund mix. Many 401(k) plans offer target-date funds that shift automatically from stocks toward bonds as the retirement year approaches. A saver who has never reviewed the default fund may be holding a mix that no longer fits their age.
Thursday’s losses followed a rally the day before, when stocks rose after the midterm results. The Nasdaq had set a record close on 6 October, then lost nearly 12 percent over the following month. For savers, the week is a reminder that a 401(k) balance moves with the market, and that the plan for coping with a fall is made before it happens, in the allocation and the contribution rate, rather than in a trade placed on the worst day.