If your 401(k) rate of return is negative, the value of your investments has dropped below what they were worth at the start of the reporting period after accounting for contributions, withdrawals, and fees. Three causes explain almost every case: a broad market decline, the specific mix of funds you hold, or plan fees eating into a flat or slightly positive return. In most cases the loss is on paper only, and it becomes permanent only if you sell at the lower price.
The Three Reasons Your Return Went Negative
Start with the market. During a bear market, generally defined as a decline of 20 percent or more from a recent high over at least two months, most stock-based funds lose value.1U.S. Securities and Exchange Commission. Bear Market Rising interest rates add pressure of a different kind: when the Federal Reserve raises rates, prices of existing bonds fall because newer bonds pay more.2SEC.gov. Interest Rate Risk — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall That means even a conservative, bond-heavy portfolio can post a negative return during a rate-hike cycle. When stocks and bonds fall together, diversification alone will not spare you.
The second cause is your own asset allocation. Two people in the same plan can end a quarter with very different numbers depending on which funds they chose. Heavy exposure to small-cap stocks, international equities, or a single sector like technology or energy can produce a loss while the broader domestic market holds steady. Bond duration works the same way: a portfolio concentrated in long-term corporate bonds falls harder during rate hikes than one built around short-term treasuries, because longer-duration bonds are more sensitive to rate changes. If your fund is actively managed, the manager’s bets can also miss — overweighting a sector that declined, or underweighting one that surged — leaving your fund trailing its benchmark even in an up market.
The third cause is fees, which get deducted whether the market rises or falls. Investment expenses are quoted as an expense ratio: passive index funds commonly charge around 0.10 percent or less, actively managed funds average closer to 0.60 percent, and some exceed 1 percent. A fund with a flat year and a 0.60 percent expense ratio will show up on your statement at roughly negative 0.60 percent. Administrative fees add on top, sometimes as flat dollar amounts: a $50 annual fee on a $5,000 balance is a 1 percent drag before any market activity. If your negative return is small and the market was roughly flat, fees are the likely culprit.
Why Your Return Doesn’t Match What Your Fund Reported
A mutual fund in your plan can report a positive annual return while your personal return is still negative. That is because plan providers calculate your figure using either a time-weighted or dollar-weighted method. A time-weighted return measures the investment’s performance over a period regardless of when money moved in or out. A dollar-weighted return factors in the timing and size of your actual contributions and withdrawals, which matters because payroll deductions land in your account throughout the year.
If you happened to put a large share of your money in right before a drop, your personal return can lag the fund’s headline number by a wide margin. Your starting balance and any transfers you made between investment options during the period shape the result too. So the mismatch is not a mistake — it is your account’s actual history reflected accurately.
What a Negative Number on the Statement Actually Means
The losses on your statement are almost always unrealized. No money has left your account. A loss becomes realized, and locked in as an actual reduction in your wealth, only when you sell shares or take a distribution at the lower price. As long as you stay invested, the value can recover when market conditions improve. Plan administrators follow standardized accounting rules when reporting these gains and losses, so the number you see is a snapshot, not a verdict.3U.S. Department of Labor. Advisory Council Report on Employee Benefit Plan Auditing and Financial Reporting Models
Recovery timelines vary a lot from one downturn to the next. The market drop in early 2020 recovered in roughly four months. The combined effect of the dot-com bust and Great Recession took over twelve years to fully work through. Neither history predicts the next cycle, but both show that a negative quarter, or even a negative year, is a normal feature of a long-horizon account, not a sign something is broken.
What to Do Now
Keep Contributing
Stopping contributions during a downturn usually works against you. Because your 401(k) money is deducted from each paycheck at regular intervals, you automatically buy more shares when prices are low and fewer when prices are high. That is dollar-cost averaging, and it turns a downturn into an opportunity to accumulate shares at a discount that can grow when the market recovers.
For 2026, you can contribute up to $24,500 in elective deferrals to a 401(k), or $32,500 if you are 50 or older thanks to the $8,000 catch-up contribution. Workers aged 60 through 63 can contribute up to $35,750 under the higher catch-up limit created by the SECURE 2.0 Act.4Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits Maintaining or increasing contributions during a decline, especially with an employer match in play, gives your future self more shares to benefit from the recovery.
Check Your Allocation if Retirement Is Close
A negative return hurts more the closer you are to needing the money. Sequence-of-returns risk describes the fact that timing matters as much as size: if the market falls early in retirement while you are withdrawing to cover living expenses, you are forced to sell more shares at depressed prices, and less of your portfolio is left to benefit from any recovery. The same downturn hitting later in retirement, after years of compounding, does less damage. Someone still decades from retirement has the opposite advantage, buying at lower prices with time to grow.
If you are within five to ten years of retirement, review your allocation. A gradual shift toward more bonds and stable-value funds and fewer equities reduces the risk that a badly timed downturn disrupts your plans. Many target-date funds do this automatically, but their glide path is set by a retirement year, not by your actual timeline or risk tolerance, so check that the two line up.
Compare Your Fees Against the Alternatives
Federal regulations require your plan administrator to disclose plan costs. Under the Department of Labor’s disclosure rule, issued under ERISA’s fiduciary standards, you must receive information about every investment option’s total annual operating expenses, expressed both as a percentage and as a dollar amount per $1,000 invested, before you first direct your investments and each year after that.5U.S. Department of Labor. Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans You should also receive quarterly statements showing the exact dollar amount of fees charged to your account and what they covered.
Compare the expense ratios of the funds you hold against similar options. If you are paying well above average for a fund that consistently trails its benchmark, that is a red flag. Anyone who manages a 401(k) plan has a fiduciary duty to act in participants’ best interests, including ensuring that plan expenses are reasonable for the services provided.6Office of the Law Revision Counsel. 29 U.S. Code 1104 – Fiduciary Duties You can raise the issue with your employer’s HR department or benefits committee, and if you believe the plan’s fiduciaries have failed to monitor fees or selected unreasonably expensive investments, federal law allows participants to file a complaint with the Department of Labor.
Two Things a Negative Return Does Not Let You Do
You cannot deduct 401(k) losses on your taxes. The IRS treats 401(k) accounts as tax-advantaged: contributions went in before tax, and the entire balance will be taxed as ordinary income when you eventually withdraw it. Because the money has not yet been taxed, there is no recognized loss to claim.7Internal Revenue Service. What if My 401(k) Drops in Value Tax-loss harvesting strategies used in taxable brokerage accounts do not apply here.
Borrowing against a shrunken balance is also more limited than you might expect. Federal rules cap 401(k) loans at 50 percent of your vested account balance or $50,000, whichever is less.8Internal Revenue Service. Retirement Topics – Plan Loans If your vested balance drops from $80,000 to $60,000 during a downturn, your maximum loan shrinks from $40,000 to $30,000. Borrowing during a decline also means selling shares at their depressed price, so those assets are not in your account when the market recovers. A hardship withdrawal is not a workaround: the IRS does not treat a drop in investment value as a qualifying hardship, so you would still have to meet specific criteria like imminent eviction or unreimbursed medical expenses.9Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions