Can you lose money in your 401K?

Yes you can. If you’re invested in something, and it loses money, you lose money.

Yes. 401ks are kind of like mutual funds. Any time you are investing in anything, you take on a certain amount of risk in losing it all. Diversifying spreads out that risk, it is like not putting all your eggs in one basket. A lot of 401ks took a major hit in the last economic downturn. That’s why people were calling them 201ks in the media.

For example, bonds are considered a pretty secure investment, but if that company goes under, there is a chance that they would not be able to make good on their end and you would lose everything. When a company folds, there is a certain order that debts get paid off. As a bonds-holder I know you are better off than stock holders, but not sure how many other people would be in line before you.

Yes. If the mortgages in your fund go south, or if the corporations can’t pay off their bonds, and if there is disinflation, you might even lose on government securities.

@Skaggfacemutt just wondering why anyone would invest money in a scheme that they did not have that kind of basic information about? Isn’t that the kind of thing you find out before you invest your money?

I have only begun to start socking money for retirement. I like the tax shelter of the 401K. The fund has not lost a cent for the past 50 years. I could sock my money into a CD instead, but then I’m getting nailed by the tax man. I really don’t know what to do. Everyone has a different opinion. That is why I am asking YOU. :)

Bernie Madoff’s funds had a great return too, there, for a while. ;)

Dang, you guys are scaring me. Maybe I should stop socking it into my 401K and put it in the bank instead.

All we’re saying is, it’s a pretty good idea to study and pay attention when making and managing investments. Unless you want to trust (and pay) some other guy/business to do it for you, but then you will want to study that guy/business to make sure it’s reliable. It’s a fool’s errand to just stick money somewhere and hope.

We’re not trying to scare you. You asked about risk an we told you there is risk. There is also reward. If you invest in stocks, then, on average, you will earn around a 10% return per year. Of course, if you’re about to retire in 2008 and you haven’t taken your money out of stocks, you are screwed. But if you’re 20 years from retirement, then it is likely that the 40% losses of net worth resulting from the recession will be forgotten because you’ve made a lot more money down the line.

Hell, we’ve made back almost half our losses already. But we’re in the market for a long time.

You should also realized that there is no safe investment. You are always taking a risk of losing money. Even in a savings account. My money market account actually lost money last year. That almost never happens.

You have to look at how long you are putting money in the market for. If you’re 25 and just starting, then you have 40 years before you’re going to use that money. Most people in that position take an aggressive approach—maybe all stocks.

As you get older, your mix of investments gets more and more safe. You switch more money into bonds and CDs. When it’s time to retire, you may only have 10% of your investments in stocks. Maybe 20% in bonds and the rest in CDs.

The market goes up and the market goes down. If you have a long term perspective, you expect these changes and losing money isn’t bothersome. You know it’ll go back up. Well, most likely. Anyway, you don’t panic. You follow your plan. If it’s a conservative plan, you’ll probably do well.

You are not going to beat inflation by socking it away in the bank. Depending on what kind of returns you are getting from the 401k, you might not even be beating inflation there, but I’d expect you’d be doing much better.

Over the long term, investing in the stock market has historically yielded solid returns, but the only thing certain is death and taxes.

You guys are so great – thanks for all the good advice and knowledge. I know a lot about a lot of subjects, but finances and investments are most definitely not one of them. I am only 3½ years away from retirement, so I can’t afford to do anything risky. My kids are grown and my house is paid for, so I have no tax shelters, and I am making the most money that I have ever made since I’ve been at the same job for 20 years. I think socking money in my 401K in the least risky investments is the way to go, but what do I know?

What is your age? If you are very young, you can go even more aggressive in your 401k choices. You may lose in the short term, but it’s always a win in the ling term.

If you’re that close to retirement you should be leveraged largely in bonds, not stocks. I recommend a book called “Personal Finance for Dummies”—no joke, I really learned a lot from it. He also wrote a book called “Mutual Funds for Dummies” I really liked.

Heck, I don’t know. My 401K company just has the “most secure” option, the “moderately secure” option, and the “high risk” option. And if you’re really smart, you can hand-pick your investments. I am in the “most secure” (which also means least amount of return) option.

@Skaggfacemutt You can get a list of investments in that portfolio. We could probably help you better if you did that.

@Adagio a 401K plan is not a scheme.

@Skaggfacemutt at your age, you should review the options offered by your plan and place your funds in low to mid-risk portfolios. Also, its always best to understand the mechanics of transferring your funds from one portrfolio to another. If you keep yourself informed, you should be ok.

Yes but you would have to really be deaf dumb and blind to the what and why of your 401 to do that. Just put away as much as you possibly can and don’t look! It will go up and down but over the long haul you will make out nicely as long as you don’t screw around with the investments. Diversify and plan your retirement!

Morning Edition has been doing a series on retirement savings that I’ve listened to on my commute. If you’re interested, the stories can be found here.

Can a dog bark?

I lost about $250,000 in my 401K over the last 3 years.
However, that was a good investment, when compared to my house value.

Yup, you sure can, and many people did, have and will.

@laureth Good reference to NPR. The very best story was entitled “401(k)s Still Fall Short as a Retirement Strategy”. 401(k)s were never intended to be a major part of a retirement strategy, but corporate America and the mutual fund industry have made them so. (Section 401k was added to the Internal Revenue Code in 1978 almost as an afterthought to the Employee Income Retirement Act {ERISA}, writtnen in 1974.) Corporate America, over the last 20 years, has abandoned defined benefit pension plans which should be a major part of an employee’s retirement and provides a lifetime income. And the trust fund for the pension plan assumes the risk, not the employee. 401(k)s were meant to be supplemental and they were meant to be managed by professional investment managers who offer a transparent fee structure. The biggies in the mutual fund industry (read Fidelity, Vanguard and many others) figured out in the early 90s that 401(k)s would be a great place to sell mutual funds….and they, in fact, persuaded corporate America to do exactly that, and the employee be damned. They knew at the time it was the wrong thing to do, that it was taking professional management expertise away from the employee while at the same time placing exponential liability on the plan sponsors (the company plan trustees).

Ok, that’s my piece…...If you are a participant in a 401(k) plan you should ask HR for a copy of the Summary Plan Description. They are required by federal law to provide that to you. You should also ask for a detailed explanation of all fees charged to the plan and passed on to you in your account. However, very few plan sponsors (company management) know the real fee and may not be able to explain. There is a very good table in the article referenced above telling you how fees dramatically affect performance. The fund companies, sometimes with the complicity of company management, are very good at hiding fees and often the representative to the plan doesn’t even know. Ask anyway. get as much info as you can. You want to be known as the one who asks lots of questions about the 401k plan. It’s your money.

Oh, and perish the thought of borrowing from your plan. It is a RETIREMENT plan, not an emergency fund.

Thing is, @Skaggfacemutt‘s investment folks have told him that (1) there are no taxes on his money, and (2) they haven’t lost a penny on this fund in the last 50 years. While I can’t prove either of these as false, there’s reason to think the first might be untrue in most circumstances, and the second thing is so remarkable, considering the downturn, that you would think that other investment firms would be wanting to work with their model, thereby propelling Utah Retirement Systems to a Known Name In Investing. Neither of these passes my sniff test.

Combine it with the fact that he’s 3.5 years from retirement, and doesn’t know much about investing or how to research investments, and that makes him a mark for the unscrupulous. (Nothing against you, @Skaggfacemutt).! That’s what makes me leery of this situation.

@laureth I agree with you 100%. There is no investment in the world that has not lost money in the last 50 years, and to even make such a claim is unscrupulous. Sounds like a Bernie Madoff claim. @Skaggfacemutt You may be 3.5 years away from mandatory retirement, but you may a lot farther than that from not working. I would suggest that you pull all your stuff together and get yourself a financial advisor whom you can trust and let him or her make sense of what you’ve got. We can’t do that here.

Just wanted to report that I called the office of the Utah State employees retirement system, and found out that I do indeed have to pay taxes on my pension. That foils my plan of taking out of my 401K just as much as a personal exemption amounts to each year. However I checked HR Block’s tax calculator, and discovered that even with my pension and taking $5,000 out of my 401K, my tax liability would be $750.00 a year (approximate, of course). I am saving that much in taxes bi-monthly by socking money into my 401K. I guess if interest rates were better, I would still rather put money in a CD in the bank. Oh, and the “safest” option with my 401K has not lost a penny in the last five years, not fifty as I said before. I just figured if it didn’t loose any through the worst of this recession, it’s pretty safe.

Still, not losing a penny in the downturn? wow. Did they gain anything?

Yes, it continued to gain interest, but the interest dropped to next to nil, like a .75 or something.