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What to Do When Your First-Quarter 401(k) Statement Arrives

Debbie Carlson

First-quarter 401(k) statements will be arriving soon.

No doubt about it, they're going to be ugly.

Amid the coronavirus market turmoil, the S&P 500 Index ended the first quarter down more than 20% -- the index's worst performance since the 2008 financial crisis. The Dow Jones Industrial Average put out its worst first-quarter performance in 124 years, falling 23%.

It's one thing to read headlines about stock market losses, but it's another when you're staring at double-digit losses in your retirement account.

"The reality is, this is not great," says Nevin Adams, chief of marketing and communications at the American Retirement Association, a nonprofit group for the retirement plan industry based in Arlington, Virginia.

Seeing a more than 20% drop in a nest egg, individual retirement account or a 401(k) account through your employer is a gut punch that will likely cause savers some major anxiety, especially if you're approaching retirement. To better prepare yourself, retirement experts have a few suggestions for what to do when your first-quarter 401(k) statement arrives:

-- Don't even open your 401(k) statement.

-- Review asset allocation and risk tolerance.

-- Continue contributing to your 401(k) if you can.

Don't Even Open Your 401(k) Statement

Chad Parks, founder and CEO at Ubiquity Retirement + Savings, says whether you should open the statement or not depends on your temperament.

"It's really a personal sentiment. How do you behave when you get bad news? It's human nature to focus on the immediate. It's very difficult to focus on the long term," Parks says.

[READ: 15 Best Performing Funds for Your 401(k)]

He adds that even at his own company, which works with small businesses to set up retirement plans, some of his employees are having a difficult time stomaching the first-quarter losses. "A lot of my own employees have a very strong emotional connection to that balance they see on the screen," Parks says.

Christine Benz, director of personal finance at Morningstar, agrees that it's an individual's decision whether to read that quarterly statement or not. Most younger investors will gain little benefit at looking at their balance; however, if you're planning to retire in the next two to five years, it's better to take a look. She says there's anecdotal evidence that soon-to-be retirees had been hesitant to de-risk their portfolios in the recent 10-plus-year equity bull market and will now be suffering the consequences.

"I think a lot of people approaching retirement had been running with a very equity-heavy mix," she says. "And realistically, that might change their plans, if their portfolios have fallen substantially, and they had expected to retire soon."

Review Asset Allocation and Risk Tolerance

Adams counsels people who open their statements to not focus on the total number. "That's not going to be pleasant news," he says.

Instead, he says to look at your asset allocation to see how it may have changed during the downturn.

Kevin Couper, a certified financial planner with WealthSpire Advisors, who has worked with 401(k) retirement plans, agrees. This might also be a time to reconsider both your risk ability and your risk tolerance.

Risk ability is the rate of return you need to achieve your goals, while risk tolerance is the pressure you can handle emotionally. He says to look at your current asset allocation and its recent performance and compare that with the 2008 financial crisis, during which the S&P 500 fell even further than the current market dip. Couper also pointed out that the market eventually rebounded.

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"Stress-test your portfolio and your mental ability to handle that," he adds.

According to Couper, most of his clients who have reviewed their original asset allocation made no changes. However, if you can't sleep at night with a more aggressive allocation -- such as 80%/20% or 70%/30% weighting in equities to bonds -- he says it may be time to make some changes, like reducing to a 60%/40% portfolio. "The important thing is to not be out of the market entirely," he says.

Savers who are OK with their original asset allocation should rebalance to get it back into its original position, Adams and Couper say. That means buying equities and selling bonds if you have a more aggressive allocation, as painful as that might feel right now. Savers may have to rebalance a few times since markets will likely remain volatile.

If you're invested in a target-date fund, Adams says it's best to adopt a hands-off approach.

"That's one place I think legitimately you can say this is in the hands of somebody who knows what they're doing as much as anybody else out there," Adams says. "If you're trying to fix it, you're probably going to make it worse."

Benz says if you planned to retire in a year or two and have big losses, you need to strategize.

Factor in all of the income sources that you planned to live on in retirement, including Social Security and any stable assets like an emergency fund or other cash-like accounts. Figure out your cash flow needs and how much you expect to withdraw from your portfolio annually. If you have stable cash flows for a year or two, you can give the stock side of your 401(k) time to recover. If not, she says, it's time to sell some holdings and put them into less risky assets.

"You don't want to put yourself in the position of drawing your living expenses for retirement from depressed equity asset," she says. "Things could get worse before they get better. So if retirement is imminent and you don't have any stability in your portfolio, it's not too late to de-risk."

Continue Contributing to Your 401(k) if You Can

If you are still employed, Benz recommends savers continue making contributions, especially if you are dollar cost averaging with biweekly or monthly contributions.

"If you can boost your contributions, even better, because you're adding to shares," she says. "Arguably, they could get cheaper from here, but they're cheaper than they were a month ago. So especially as a younger investor, you have the opportunity to add to shares on the cheap."

[Read: How to Max Out Your 401(k) in 2020]

By younger, she means anyone with 10 years or more until retirement. Even if you are closer to retirement, she recommends continuing with a dollar cost averaging strategy and if you have the financial ability, take advantage of " catch-up contributions," which is the extra money people older than 50 can contribute to their 401(k)s.

Couper says if you still feel queasy about adding money to your 401(k), you can change the allocation of future contributions to more conservative investments. That still keeps you in the habit of saving.

"With the new dollars, you can be a little bit more conservative and then reassess down the road, depending on where markets are," he says.



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