Why your 401k Doesn’t Recover After Market Gains

Investments Carry Risk

For millions of Americans, the 401(k) is the default retirement plan. It’s what most employers offer, and it’s been marketed as the golden ticket to a secure retirement. But if you’ve checked your account during or after a market dip, you’ve probably asked yourself: Why does it take so long to recover?

Let’s break down how the 401(k) really works, and more importantly, why it shouldn’t be your only retirement strategy.

How the 401(k) Works (for Most People)

The average American’s 401(k) is composed of mutual funds—pooled investment vehicles that invest in stocks, bonds, and other assets. These funds are:

• Actively or passively managed

• Traded regularly based on fund managers’ strategies

• Subject to fees, even when the fund performs poorly

When you contribute to your 401(k), your money is buying shares in these funds. But you don’t control the timing of the trades. If a market crash occurs, many mutual funds rebalance by selling off assets—sometimes at a loss. These losses become locked in, meaning they aren’t just paper losses. They’re realized.

Why 401(k)s Struggle to Recover

Even when the broader market rebounds, your 401(k) may not fully recover. Here’s why:

1. Locked-in losses: As mentioned, fund managers often sell during downturns, solidifying losses rather than waiting for a recovery.

2. Sequence of returns risk: If you’re close to retirement or withdrawing funds, a market dip early on can have a permanent impact.

3. Limited asset classes: Many plans don’t offer access to alternative investments like real estate, annuities, or commodities.

4. Fees eat away gains: Annual fees and expense ratios continue regardless of performance.

Case Study:

Jane, age 58, had $250,000 in her 401(k) in late 2021. After the 2022 market downturn, her balance dropped to $195,000. Even by late 2023, her account had only rebounded to $212,000—despite the market nearing its prior highs. Why? Her mutual funds had locked in losses during the downturn and failed to capture the full rebound.

A Better Way: Diversified, Purpose-Driven Retirement Planning

Relying solely on a 401(k) is like trying to build a house with just a hammer. Here’s what a smarter, holistic plan can look like:

1. Fixed Indexed Annuities (FIAs)

• Protect your principal from market loss

• Lock in market gains annually

• Provide guaranteed lifetime income

• Act as your personal pension—even if you live to 100

2. Passive Income Through Real Estate

• Rental income can provide consistent cash flow

• Depreciation offers tax benefits

• Can hedge against inflation better than many traditional assets

3. Dividend-Paying Stocks and ETFs

• Offers cash flow regardless of market price

• Reinvesting dividends can boost compounding

• Blue-chip dividend stocks tend to be more stable long-term

4. Cash-Value Life Insurance (Optional but Powerful)

• Can be used to build tax-free retirement income

• Offers living benefits (chronic illness, terminal illness, etc.)

• No market risk if structured properly

The Bottom Line

Your 401(k) can be a helpful piece of your retirement puzzle, but it should never be the whole plan. Losses can be locked in, fees can eat away at returns, and market volatility can put your future at risk—especially if you’re near retirement.

A well-structured plan includes protection, growth, and income. It combines traditional tools like the 401(k) with annuities, real estate, dividend stocks, and other strategies that create resilience and income certainty.

Want help building a diversified retirement plan?

Connect with a licensed retirement planning specialist who can help you protect what you’ve worked hard for—and grow it into something lasting.