What’s the game plan? Managing your 401(k) through crisis

Bryce Schuler

Today’s workers are implored to contribute to their 401(k)s — and for good reason. The practice is rooted in a simple concept. Workers deduct, contribute and invest a portion of each paycheck automatically. The 401(k) portfolio ideally grows over time with minimal thought or oversight until retirement.

But what happens when a crisis interrupts this rosy picture? The definition of a crisis varies from person to person — it might be a sharp 6% market drop in a single day, like we saw in early April, a medical emergency or even a job loss. Regardless of the situation, a clear decision-making framework can help you navigate the unexpected. It’s also essential to understand how your retirement plan fits into this picture.

A recent survey found that 4.8% of Americans took early retirement withdrawals in 2024. Moreover, the first quarter of 2025 witnessed the highest level of 401(k) trading activity since the early pandemic. Both statistics are symptomatic of a financially insecure workforce.

Following is a framework for managing your 401(k) plan through good times and bad.

Stick to a plan. Any investment plan requires consistency for optimal results. Countless studies show that disciplined investors outperform those who change their holdings during market shocks. The key is that your investment plan aligns with your goals, timeline and risk preferences.

Young investors can generally assume more investment risk than their older counterparts. This is because they have time to weather inevitable dips in the market. It took approximately six years for the market to recover from the 2008 financial crisis, while it took only 4.5 months to recover from the COVID-19 shock. Both events were temporary setbacks for young and middle-aged investors. Those who stayed calm, remained invested and continued contributing to their 401(k)s prevailed.

Adjust this plan only when your circumstances change. While disciplined investors outperform, there are situations where a strategy change may make sense. The key is that this adjustment reflects a change in your circumstances, not a recent headline, geopolitical disruption or market surprise. A competent advisor can help identify whether a change is warranted.

Adjustments occur at life’s natural inflection points. For example, investors should generally reduce investment risk as retirement approaches. The exact timing is debatable, but many planners encourage investors to revisit their portfolio strategies within 5 to 10 years of their anticipated retirement dates. Other triggering events might include a marriage, divorce or death in the family.

Know your distribution options. It is unadvisable to draw from retirement accounts before you stop working. After all, these accounts are intended to fund your future lifestyle. But this is not always practical for millions of Americans struggling to afford grocery costs, housing expenses and child care commitments. In fact, retirement accounts might be the only available spending bucket when other sources run dry.

Participants are often well aware of the guardrails surrounding their retirement money. 401(k) funds are largely inaccessible until age 59.5. There are narrow exceptions to this rule if the participant dies, becomes disabled or experiences medical expenses exceeding certain thresholds.

Less understood are the other qualifying events — called hardship withdrawals — that allow participants to access their money early. Hardship withdrawals can cover immediate tuition payments, housing payments to avoid foreclosure or eviction, funeral costs, damage to one’s personal residence and even the purchase of a new principal residence. Bear in mind that hardship withdrawals remain subject to income taxes and the 10% early withdrawal penalty. Moreover, participants must demonstrate there is an “immediate and heavy” need and no other resources are available to meet it. Hardship withdrawals can, and should, only be a last resort.

A compromise for many is the 401(k) loan. This option is only available at select employers and it allows participants to borrow from their 401(k) balances on a tax-free basis. The caveat is that the loan generally cannot exceed 50% of the participant’s vested account balance. Moreover, the loan usually must be repaid within five years under a scheduled payment plan. Finally, missed payments can make the outstanding loan balance taxable and subject to the 10% penalty.

The final option applies to Roth 401(k)s. These accounts allow participants to pay taxes up front on their contributions and avoid taxes in the future. The law allows Roth 401(k) participants to access these contributions tax-free and penalty-free. However, the IRS requires participants to withdraw a portion of contributions and earnings when taking early distributions from a Roth 401(k). This means that an early Roth 401(k) withdrawal is at least partly taxable and subject to penalty.

401(k)s are the most important financial asset for most Americans. It behooves participants to adopt a game plan aligned with their long-term objectives. It is equally important for them to know their options when life calls a timeout.

Bryce Schuler, CFP, is a financial advisor with Baldwin & Clarke Advisory Services, LLC in Bedford.