Six ways to protect your 401(k) from the coronavirus recession

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Apr. 9, 2020

The coronavirus has hit financial markets across the world, hurting investors’ taxable portfolios and retirement accounts such as their 401(k). Even as the global pandemic is throwing economies into recession, investors have a number of options to keep their money protected.

They can limit the damage by taking smart steps, positioning themselves to make the best of the downturn with a few basic moves. When it comes to your 401(k), it’s important to take a long-term perspective, and investors ought to see the downturn as an opportunity rather than a threat, if they have at least several years left until retirement.

Here are six ways that investors can protect their 401(k) from the economic contagion created by the coronavirus shutdowns and use the (hopefully) temporary dislocation in the market to make their portfolio stronger for the long term.

1. Focus on what you can control – your behavior

“There are two big enemies for investors – the coronavirus and human nature,” says Dan Ariely, chief behavioral economist at Qapital. “But we can control the human element.”

And we know what works for investors: a long-term focus with the investor adding to the market regularly over time and then holding on to stocks, letting them rise as the economy grows. If used properly, the 401(k) with its biweekly contributions is perfect for this task.

So you’ll need to do whatever it takes to stick to this investing plan, which has worked in recession after recession. For some investors, that means keeping your 401(k) on autopilot. For others, it means not looking at the portfolio while it’s down in order to avoid fear.

We all get emotional when we look at financial losses, but what separates the winners from the rest of the bunch is the ability to control their reactions to those emotions. Those who set themselves up for future financial success make smart decisions despite their fear and uncertainty. Stay courageous and continue following a long-term investment strategy that works.

2. Stand pat, if your long-term plan is solid

The best course for most investors is to do little or nothing. If they need short-term money, then it may make sense to sell some investments, and then resolve to keep such money out of the market in the future. However, if your time horizon is more than five years, you’ll likely be better off not touching your investments. Over long periods the market has returned about 10 percent annually.

Ariely divides investors into three groups: the experts who really understand the market and can predict it, average investors who don’t know anything about the market but think they do, and average investors who don’t know anything but know they don’t know.

“There are very few individuals in group one, and these people can navigate a volatile market,” says Ariely. “The rest of us are divided between the other two groups.”

The solution for the third group is to do nothing, says Ariely. Meanwhile, the second group should do nothing AND not check their accounts in order to avoid stirring up emotions that could cause them to act irrationally.

“This is certainly a scary time, but when it comes to the market, the world has been here before,” says Brendan Erne, CFA, director of portfolio management at Personal Capital.

“If you were already invested in a properly diversified, long-term strategy, you probably shouldn’t do much. There is always an urge to act during times of panic, but this tends to do more harm than good,” says Erne.

Fortunately, it appears that most investors are at least purposely holding onto their retirement investments, according to a recent Bankrate survey.

3. Add more, and take all the free matching money you can get

Even if you opt to stand pat on your investment strategy, it can still make sense to add more to the account by upping your contribution percentage. Using this strategy while stocks are down, you’ll be buying stocks at relatively lower prices, setting yourself up for better future returns.

If you want to add more, you’ll need to contact your plan’s administrator and adjust the withholding percentage there. Often this change can be done online with a few clicks, but sometimes you may have to make a phone call. As usual, the money will be taken out of your paycheck before you see it and invested in your plan.

The easiest and most secure return you can achieve, however, is your employer match. It’s a risk-free profit. Employers will often give you 3 to 5 percent of bonus money if you add a similar percentage to your 401(k). So be sure that you receive the full matching amount.

Contribution limits for 401(k) accounts have risen in 2020 to $19,500 for those under age 50, while those over that age may add an additional $6,500 in catch-up contributions. Importantly, this amount does not include any matching contributions, so the amount you can actually sock away each year can actually be higher, if your employer offers a match.

4. Reassess your portfolio for diversification

And if you’re adding more to your portfolio, it can make sense to diversify your investments. Diversification helps limit your risk and can actually increase and smoothen your returns. To get diversification, investors should search for investments that are not correlated with each other.

If you’re over invested in stocks or stock funds, for example, you might consider bonds. If you have too much in the market, you may opt to add cash to a money market fund, so that you have funds to reinvest in high-return assets such as stocks later.

If you’re investing in individual securities rather than funds, which some 401(k) accounts allow, it’s also a good time to re-evaluate.

“If you have concentrated positions, it is a good time to assess the risk here,” says Erne. “In a recession, some companies that seemed strong just last month will fail.”

Other investors may turn to real estate funds or commodities funds, which can also be volatile during some periods. Your 401(k) may or may not offer these alternative investments, however. But virtually all 401(k) plans will offer a few bond funds that can diversify stock exposure.

5. Avoid early withdrawals

Early withdrawals are a killer for a successful retirement, so you need to do everything you can to avoid them. That goes double when the market is down, since you suffer not only from having a lower balance in the account but also from selling and not enjoying the future rebound. On top of all of that, the IRS may hit you with an early withdrawal penalty.

One alternative is to take a loan from your 401(k), if the administrator offers it, and not all do. You’ll have to pay back the loan, but at least you can avoid the income tax and a penalty on a withdrawal. A loan is generally not a great solution, because it may limit future contributions that you otherwise would have made and you’re repaying the loan with after-tax money from your paycheck.

The best solution is to avoid taking out any money, if you can help it at all. Your 401(k) account is about the last thing you should tap for money, especially for any expense that you can delay.

6. Target your risk to your age

It’s important to remember that your risk tolerance should change as you approach the time to actually tap your account for money. You’ll no longer be in the category of an investor who has decades to let the market sort out its ups and downs. And that means your investments should reflect that, too.

Many investors opt for target date funds to manage their portfolio. Such funds move your assets over time from riskier ones such as stocks to less-risky ones such as bonds and money market funds. You set your retirement year, and the fund rebalances the portfolio as you near it.

If you don’t have such a fund, then you’ll have to make this adjustment yourself. Experts often recommend that you have at least a three-year investment horizon to invest in stocks — and five years is better — given the volatility of the market. As you get closer to needing the funds, you’ll want to gradually shift to lower-risk assets that provide cash.

This advice doesn’t mean that you need to go entirely into bonds or cash as you hit retirement, however. You’ll want to have at least some stocks to offer growth, lest you outlive your assets.

Bottom line

While the global economy is facing a recession, that doesn’t mean investors should sit on their hands. They can plan how they’re going to position their 401(k) portfolios to come out of these tough economic times stronger and better suited to meet their future financial needs.


My Two Cents

This pandemic presents a golden opportunity to start investing in the stock market. It’s called “Dollar Costs Averaging” where you put a little bit in the market on a consistent basis over a long (or short) period of time. Let the magic of compounding and Dividend Reinvestments lets you portfolio grow.


As always, seek professional assistance to guide you through the fantastic world of investments. You can always order my book “A Beginners Guide to Wealth Building – Defined Contribution Plans.

Robert L Woods

Robert L Woods

I am a personal finance and investment educator who’s passion is to teach financial literacy to my community to give them financial empowerment so they can control their own destiny.

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About Me

Robert L. Woods is the retired partner of the Institute For Fiduciary Education ( that provided investment seminars for public and private pension funds, endowments and institutional fund managers. He spent 28 years working for the State of California, as a budget and financial analyst which includes 16 years as an Investment Officer for the California State Teachers’ Retirement System (CalSTRS). At CalSTRS, he established it as one of the nation’s first institutional home loan programs with a down payment assistance component. He also spent 13 years on the Board of Trustees for the Sacramento County Employees Retirement System (SCERS). He was a Trustee with the University of California, Davis, Cal Aggie Alumni Association and a member of the Chancellor’s Council on Community & Diversity. He is a Life Member: Phi Beta Sigma Fraternity, Inc., Theta Gamma Sigma Chapter, Sacramento, CA.

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