Making smart, confident investing decisions means having a plan — not just in the coming days but for the long term.

For many individuals, this includes participating in an employer-sponsored 401(k) plan as part of a retirement portfolio. One of the most widely used investment vehicles for retirement, 401(k) plans allow you to contribute to your future with tax efficiency.

If you’re contributing to or have a 401(k), you may be keeping a close eye on it and observing performance during market volatility. In times of uncertainty, retirement savers may be concerned about the impact of a potential recession on their retirement plan.

Depending on your age, asset allocation, risk tolerance and long-term financial goals, you may ask yourself, “Is my 401(k) protected from market downturns? If not, how can I create a plan so my retirement has the best possible chance for withstanding this period of volatility?”

One way you can get perspective is by using Empower’s Recession Simulator. This free, interactive tool shows you how your retirement plan may have been impacted by a market event like the Dotcom Crash or 2008 Financial Crisis. 

How to help protect your 401(k) investments during stock market volatility

1. Diversification and asset allocation

Trying to navigate uncertain times without setting financial goals and having a strategy can make volatile periods even more difficult to handle. If you don’t know how much you will need to have in your nest egg for retirement, it becomes difficult to assess how you are tracking for retirement, and how your portfolio might handle bear markets (a financial market experiencing prolonged price declines, generally of 20% or more) and recessions.¹

In order to plan for retirement and establish long-term financial goals, consider several factors:

• How many years you anticipate working until you reach retirement
• Your risk tolerance level
• Key purchases or spending events
• When you might take Social Security benefits
• Other financial goals, such as funding a child’s college education

A financial professional can assist you with building a financial strategy that will best position you to help meet your long-term goals. Investors seeking a tool to help keep track of their retirement goals and progress can access the Retirement Planner by signing up for Empower’s free financial tools.

After developing long-term goals, you can establish how much you will need in your 401(k) to support your lifestyle. Consider thinking about not only how much you’ll need, but where you could be saving with advice from either a financial professional or help from Empower’s Savings Planner. How much cash should you have? Should you contribute to a 401(k) and an IRA?

Again, working with a financial professional to determine an asset allocation for your investments may help to move you closer to reaching your ultimate goals.

The last part of having a solid plan for retirement is helping to ensure that you’re invested in a diversified portfolio.

Where possible — and this will depend on your 401(k) plan’s investment options — a globally diversified portfolio of U.S. and International stocks and bonds, as well as alternatives, may reduce your 401(k) risk during market downturns. Consider consulting a financial professional for the right mix of investments based on the available fund options within your plan.

2. Rebalance your portfolio

Along with setting long-term financial plans and helping ensure that your 401(k) is diversified, strategically rebalancing could help reduce your risk to market volatility.

So, what is portfolio rebalancing?¹ It’s the practice of keeping strategies close to their target allocations, typically by selling what has done best and buying what has fared worst. This is somewhat counterintuitive, at least on an emotional level, but this is buying low and selling high, and over time, it may have a meaningful positive impact. Rebalancing also tends to work better during periods of volatility, so while it may feel uncomfortable, bear markets can be good rebalancing opportunities.

Overall, diversified portfolios with a mixture of various assets can help reduce an investor’s exposure to risk. It’s generally a good idea to review your 401(k) portfolio on a regular basis to help keep your asset allocation in line with your retirement goals.

3. Keep contributing to your 401(k)

Fear in the market often causes investors to panic and stop contributing to their 401(k) altogether during the periods of volatility. While it's important to be prepared during uncertain times and have enough cash (generally 3-6 months of living expenses) in your emergency fund, investors should continue to contribute to their 401(k) if they have the ability to do so. Bear markets cause the prices of some assets to go down, so looking at the down market as a buying opportunity can help increase overall return when the markets eventually rebound.

The other thing that can happen in down markets is that investors may try to “time the bottom” of the market and wait to contribute money. Instead of trying to time the market, investors who have enough in their emergency savings should stay the course by continuing to contribute to their 401(k). Getting into the market sooner than later is generally a mentality that may help reap rewards over the long-term horizon.

If you have an employer-match program, consider raising your contribution (if you have enough in your emergency fund and are already not taking advantage of the match program) to at least the amount that will get you the full match. Those additional funds may help make up for some of the potential losses caused by a market crash. For example, if an employer matches up to your first $3,000 contributed to your 401(k), investing that amount can help you take advantage of the full employer match.

4. Stay calm and disciplined

Market downturns can be reasons for anxiety and emotional panic for many, especially as it relates to their hard-earned money in their 401(k) retirement plans. While the fear around a volatile market may make you feel the need to do something, anything, sometimes the best thing to do is just stay calm and stick to your long-term strategy. In other words, if you have a solid financial plan, and your 401(k) is well-optimized, sometimes the best thing to do in a market downturn is to stay the course, especially if you are a younger investor with years until retirement.

If you are closer to retirement, market downturns can be more concerning. But being properly prepared is key. Consider talking with a financial professional to help ensure that your risk tolerance and asset allocation reflects your retirement goals.