Stock market turmoil sparks 401(k) concerns amid trade war fears

[UNITED STATES] Stock markets in the United States and around the world have fallen since last week, when President Donald Trump imposed taxes on most imports. The sell-off is prompting some Americans to reconsider their financial assets, despite financial advisors' advice to continue the course.

The tariffs, which target $200 billion worth of Chinese goods, have sparked fears of a prolonged trade war between the world’s two largest economies. Analysts warn that escalating tensions could disrupt global supply chains, raise consumer prices, and further dampen investor sentiment. This uncertainty has contributed to the recent volatility in equity markets, with the S&P 500 and Dow Jones Industrial Average both posting significant losses over the past week.

According to data from Alight Solutions, which manages business 401(k) plans, only 0.10% of 401(k) assets were withdrawn or deposited last week. While small, the share is noteworthy, according to Alight's research director Rob Austin, who stated in an email: "This is roughly four times average, because we typically see this level once a month."

More than half, or 53%, of the withdrawals in the week ending April 4 — $140 million — came from large-cap US equities, he added. Almost the same amount—52%, or $138 million—went into stable value funds.

The shift toward stable value funds suggests a growing preference for lower-risk investments amid market turbulence. These funds, which typically invest in short-term bonds and other fixed-income securities, are designed to preserve capital while offering modest returns. However, financial experts caution that over-reliance on such conservative options could limit long-term growth potential, especially for younger investors with decades until retirement.

According to Alight data, total 401(k) balances dropped from $262 billion at the start of the week to $245 billion by the end of the day on Friday, a 7% decrease on average.

The Investment Company Institute estimates that approximately 70 million Americans enroll in 401(k) plans. Fidelity Investments, one of the nation's major retirement plan providers, reported an average 401(k) balance of $131,700 at the end of 2024. A 7% fall in that account balance would result in $9,219 in paper losses in just one week.

Historical data suggests that market downturns, while unsettling, are often temporary. For instance, during the 2008 financial crisis, 401(k) balances plummeted but eventually recovered as markets rebounded. Advisors emphasize that knee-jerk reactions—such as pulling money out of equities during a slump—can lock in losses and derail long-term financial goals.

To withstand a retirement savings squeeze, financial gurus recommend sticking to a strategy that matches your willingness to take financial and emotional risks. Here are three techniques that may help.

Decide on an investment strategy and stick with it. "I strongly believe in sticking to an investment policy statement that reflects my needs, and I tune out the rest of the noise," says Carolyn McClanahan, a certified financial planner, physician, and the founder of Life Planning Partners in Jacksonville, Florida. "We are helping our clients do the same."

Having a strategy can offer you confidence that any changes you make will align with your investment objectives. "It is completely OK to make changes as needed. It also entails discussing the potential diminished upside of doing so," said CFP Lee Baker, founder of Claris Financial Advisors in Atlanta. Financial gurus advise against burying your head in the sand. "There are likely to be some tremendous buying opportunities in the wreckage," he said, "but it requires both diligence and patience." McClanahan and Baker are both members of CNBC's Financial Advisor Council.

Many investors prioritize accumulating cash reserves. For example, when it comes to retirees or those who plan to quit working soon, Baker suggested that they take "some risk off the table" and have enough cash "to sustain withdrawals for a year."

Money market funds can help with retirement and investing portfolios if you aim to retire within the next five years or are already retired, according to financial counselors and investment strategists.

These so-called "cash equivalents" are extremely liquid investments that, unlike money market accounts at banks and credit unions, can be held in 401(k) and other qualifying retirement plans. Bankrate reports that the top money market funds are currently yielding 4% or higher.

Adding cash to a high-yield savings account for emergencies might also assist develop a "buffer" to handle higher everyday expenses caused by tariffs. The national average savings account interest is less than 1%, but some online banks offer rates of 4% or higher, according to Bankrate.

Even policymakers are confused about the economic consequences of tariff policy changes. If the economy slows, the Federal Reserve may move to decrease interest rates, or it may raise rates to address inflation worries. However, it is unclear what will be needed.

Some economists argue that the tariffs could exacerbate inflationary pressures, as higher import costs may be passed on to consumers. Others contend that the measures could strengthen domestic industries by reducing foreign competition. The mixed outlook has left investors grappling with how to position their portfolios, underscoring the importance of diversification and risk management.

"We'll have to wait and see how this plays out before we can start making those adjustments," Federal Reserve Chairman Jerome Powell said on Friday during remarks at the Society for the Advancement of Business Editing and Writing conference in Arlington, Virginia. Financial gurus propose focusing on the basics to help you deal with the uncertainties.

“If a trade war will reduce economic growth, what asset classes should you overweight in that environment? That’s different than changing your allocation because of a policy decision,” said CFP Ivory Johnson, founder of Delancey Wealth Management in Washington, D.C. Johnson is also a member of the CNBC FA Council. “Pay more attention to the data than the narrative.”