News Archive

Rule No. 1: Don't Look at Your 401(k) Right Now

By Keith Morelli

TAMPA (March 18, 2020) -- The wildfire spread of COVID-19 is sickening people, some of whom are dying, all over the world. It’s also wreaking havoc, as collateral damage, on global financial markets. Stocks are tumbling and along with them are the values of retirement accounts.

It’s important to remember though, that this is a disruption, said Robert Tiller, instructor in the USF Muma College of Business’ Finance Department and Raymond James Director of the Personal Financial Planning Program, and that’s not the same as a dismantling.

"This crisis is horrific, but temporary," he said, "and markets are not being irreparably dismantled, just severely challenged."

 As with any period of significant market decline and uncertain family finances, people may look to their retirement plans, including their 401(k) or 403(b), and wonder if they should avoid potential loses or perhaps tap into those funds to get by, Tiller said. Some folks may need to derail their ongoing savings to keep more liquid funds during this crisis, while others will need to deplete some of their investments — just to get through.

Borrowing from a 401(k) plan is sometimes viewed by employees as a way to access funds without having to incur the taxation (and possible pre 59½ withdrawal penalty of an extra 10 percent tax) from an actual plan withdrawal.

Tiller suggested calling human resources representatives to learn about funds availability, rates and timetables for repayment of these types of loans. 

However, borrowing from a company plan is not without risk.  Should an employee be laid off or seek to change employment, these loans may become immediately due upon separation from service.  That would make the amount of unpaid loan remaining a taxable distribution — even worse if the borrower was also under 59½ and was subjected to the additional extra 10 percent tax penalty.

Talk to your financial advisor.  Ask if your portfolio is diversified and still meets your long-term investment objectives.  If the answer is “yes,” and you have sufficient resources elsewhere, you may be in a position to take advantage of dollar-cost-averaging (DCA) during this crisis. DCA works in the investor’s favor over the long-term because that ongoing investment stream will buy more shares of an investment when it is down and fewer when it is up.

If you’ve decided you need to cut back on your monthly savings, or even if you’ve given up on the markets, don’t give away the employer match. Most 401(k)/403(b) plans have an employer match on the first portion of employee contributions. Those matching dollars should not be bypassed, even if people are anxious about the market — because they may be able to simply select a conservative or fixed account that will still receive their employer’s matching contribution.

Really, This Isn’t the End of the World

The COVID-19 crisis is basically like a war, he said, and what seems like the end of days at the time eventually comes to a close and people start anew.

So how do we win a war against a viral opponent?

“First, we must commit ourselves to whatever temporary sacrifices are necessary,” he said. “Committing to a common cause should help to strengthen our personal resolve while bolstering our collective resilience.”

The first concern, obviously, is on the health front, shoring up the health care industry to test and treat those infected.

On the economic front, he said, the war also rages and is certainly disrupting the stock market and causing major concern among all those with retirement plans, including 401(k)s and 403(b)s. Retirement plan contributors are seeing the value plummet and are wondering how long it will take to recover.

Be Patient, Recovery is a Part of the Process

“Markets have always recovered — this one will too,” Tiller said. “Disruption typically leads to delays, not destruction. Our financial markets are not being dismantled, just severely challenged.

“While investors may indeed be on edge, it is not correct to interpret the stock market gyrations as indicative of ongoing emotional responses to each day’s actions or commentary,” he said. “The vast majority of market transactions – about 75 percent – are triggered by mathematical algorithms.  These computer programs are not feeling stress, anxiety or fear.  But the volatility of the markets and any temporary decreases in individual investors’ portfolios can allow those emotions to take root at home.”

Perhaps someday, he said, the mathematical algorithms that have resulted in the dramatic market volatility may even learn from this crisis.

When it comes to personal financial responses, keeping things in perspective helps.

“Picture yourself in the middle of a significant weather event,” he said. “Wishing you weren’t there is reasonable, but has no effect on your circumstances. It may require dramatic and sometimes unpleasant efforts and/or actions to ride out the storm.

“But also realize that once the storm has hit, it is too late to then reinforce or implement changes to protect your property — instead, you must wait until it has passed to rebuild.

“Like all storms, this COVID-19 crisis will eventually run its course, allowing us to once again pursue the things we desire.  Including family financial objectives:  education, lifestyle goals, even retirement.”

To help get through the COVID-19 financial challenges, folks should consider the British axiom: “Stay Calm, Keep Moving,” which may allow people to still feel in control of themselves, even if not their circumstances.

During the crisis, people need to assess their day-to-day finances, he said.

Those liquid funds at the bank, such as checking, savings, or similar accounts , not already committed to basic living expenses such as, food and shelter, are folks’ first resource, he said, followed by other liquid accounts they may have though it is wiser to avoid retirement fund withdrawals unless absolutely necessary.

What to do Today

Crisis spending for any individual or family should always be somewhat cautious, he said, to minimize a spend-down of their assets.

“Items should be prioritized over less necessary things,” he said, “which can simply be put on hold until finances improve.”

When even those bare necessities require spending beyond one’s incoming income or available resources during a crisis, it is important to make sure that any temporary debt incurred as the result of a temporary short-fall, stays a temporary deficit,” he said, “and doesn’t become any larger than is absolutely necessary to get through the crisis.”

It is also important to remember that whatever financial actions need to be undertaken in the near-term, they do not mean one should abandon the long-term financial objectives.

“Suspending savings, buying or indulging is not the same as stopping all together,” he said. “When the crisis has passed and the ability to assess the damage arrives, that’s when resources that were diverted from one goal can go back; perhaps making the attainment of that goal a bit delayed, but not abandoned.”

Most are in the same situation, he said, so think of others – family, friends, neighbors, displaced employees, local business owners, civil servants, etc. – who are impacted by this pandemic.

“Communities are often drawn together during times of crisis,” he said. “Even with social distancing, there may be ways to financially or emotionally support those in need.”