Protecting Your 401k from a Decline in the Equity Markets

I read an article recently about a movement being led by retirement experts from The Brookings Institution in Washington that would allow 401k participants to direct a portion of their retirement plan contributions into a guaranteed-income offering in 401k plans - the idea being that 401k participants could protect a portion of their retirement savings from a decline in the equity markets.

While this new initiative is apparently aimed at persuading lawmakers and employers that guaranteed-income vehicles are a critical component of America’s 401k plans, the concept of protecting a portion of your retirement savings from a decline in the equity markets is not new. I have been using this strategy for many years in my practice. In fact, I write all about it in my book. Chapter 7 describes in detail the concept of placing a portion of your investment portfolio in a tax-deferred savings vehicle that will 1) protect your retirement income from a market downturn during retirement, and 2) provide a stream of income guaranteed to last for the rest of your life.

Understand that although proposals are being developed to increase the interest and the usage of guaranteed-offerings in 401k plans, many plan participants can implement strategies to protect a portion of their retirement savings via guaranteed tax-deferred savings vehicles right now. In other words, you do not have to wait for the availability of such a program as an option within your particular company plan.

In Chapter 7 of my book, I describe the process of converting a portion of your portfolio into alternative tax-favored savings vehicles to protect a large portion of your assets from market declines increasing the lifespan of your investment portfolio.

I’ve also written about another opportunity that many people may have to move a portion of their money and protect it from a market downturn. An in service, non hardship withdrawal may provide early access to your retirement account if it is permitted by your retirement plan. If permitted, you may be able to request an early retirement account distribution which can then be transferred directly to a rollover IRA where a portion of your retirement assets can be placed in a guaranteed tax-deferred savings vehicle designed to protect your retirement income from a market downturn during retirement. It is important to understand that with this option any money you take out in the form of a distribution is subject to ordinary income tax and a 10% penalty tax if you are under the age of 59 1/2.