Weathering the Storm: How Recent Market Volatility Impacts 401(k) Participants and Strategies to Reduce Risk

Market Volatility Can Be Stressful for 401(k) Plan Participants

As of April 2025, the stock market has been a wild ride. From sharp declines in the S&P 500 to jittery bounces fueled by economic uncertainty, recent volatility has rattled investors—especially those with 401(k) plans. For participants relying on these accounts for retirement, the ups and downs aren’t just numbers on a screen; they’re a direct hit to future security. But amidst the chaos, there are actionable steps to steady the ship, including the option to roll over funds into a fixed index annuity. Here’s how volatility is affecting 401(k) participants and what strategies they can use to reduce risk.

The Volatility Rollercoaster

The past few months have seen markets lurch from one extreme to another. Inflation fears, shifting interest rates, and global tensions have conspired to send stocks tumbling—some days by double-digit percentages—only to claw back gains in sporadic rallies. For 401(k) participants, this isn’t abstract news. A 20% drop in the market could shrink a $200,000 account to $160,000 overnight, a gut punch for anyone nearing retirement. Younger savers might shrug it off, banking on decades to recover, but for those within a decade of retiring, it’s a threat to years of careful planning.

The real danger lies in sequence-of-returns risk. If you’re withdrawing funds during a downturn—like many retirees must—you’re selling assets at depressed prices, locking in losses and depleting your nest egg faster than planned. Even for those still contributing, volatility can spark panic, tempting them to halt investments or shift everything to cash, potentially selling at a lower share cost or missing the rebound.

Strategies to Reduce Volatility

The good news? Participants aren’t powerless. Here are practical steps to tame the turbulence in a 401(k):

1. Diversify Within the Plan

Most 401(k)s offer a mix of stock funds, bond funds, and stable-value options. Shifting some assets from stocks to bonds or cash equivalents can dampen volatility. Bonds, while not immune to losses, tend to zig when stocks zag, offering ballast. For example, moving to a 50/50 stock-bond split from an 80/20 allocation could cut risk without sacrificing all growth potential. Check your plan’s options—target-date funds often adjust this automatically, but you can customize if allowed.

2. Keep Contributing (Dollar-Cost Averaging)

Volatility slashes share prices, but that’s a silver lining for regular contributors. By sticking to your biweekly 401(k) deposits, you buy more shares when prices are low, lowering your average cost. When markets recover, those cheap shares fuel bigger gains. Pausing contributions out of fear? That’s a missed opportunity—history shows markets rebound, often sharply, after downturns.

3. Rebalance Regularly

Volatility can skew your allocation. If stocks drop and bonds hold steady, your 60/40 plan might drift to 50/50. Rebalancing—selling some bonds to buy stocks—keeps your risk profile intact and forces you to “buy low, sell high.” Most plans let you set this up automatically annually or quarterly. It’s disciplined, not emotional, and it works best in choppy markets.

4. Build a Cash Buffer Outside the Plan

For retirees or those close to it, keeping 1-2 years of expenses in a savings account or money market fund avoids the need to tap your 401(k) during a crash. This cushion lets your investments ride out the storm, preserving principal for the inevitable upturn.

5. Consider a Roll Over to a Fixed Index Annuity

For a more structural fix, consider rolling part of your 401(k) into a fixed index annuity (FIA) whose returns are not directly tied to the market. If your plan allows in-service withdrawals (common after age 59½) or you’ve left your employer, you can transfer funds to an IRA, then purchase an FIA. These products link growth to a market index like the S&P 500 but cap losses at zero—your principal is safe even if stocks plummet. For instance, Nationwide New Heights offers a version with a 30% bonus on your initial amount and 9.5% guaranteed annual growth on an income base for up to 12 years. Learn more about this option here.

Contact us at info@legacystrong.com to learn more about these solutions.

Why It Matters Now

Today’s volatility isn’t a blip—it’s a wake-up call. With economic signals mixed and no clear end to the turbulence, 401(k) participants can’t just hope for the best. Diversifying dampens the blows, steady contributions turn dips into deals, and rebalancing keeps you on course. A cash buffer buys time, while an FIA offers a safety net with growth potential—especially appealing when stocks feel like a casino.

The Bottom Line

Recent market swings have 401(k) holders on edge, but panic isn’t a plan. Younger participants can lean on time, buying low and waiting it out. Those closer to retirement need stability—diversification, rebalancing, and cash reserves deliver it. Rolling into a fixed index annuity takes it further, trading some flexibility for guaranteed protection and income. Check your plan’s rules, consult a financial advisor, and act deliberately. Volatility’s here, but your retirement doesn’t have to suffer.

Want to discuss your options with a member of our team?

Contact Us