Why Is My 403(b) Losing Money?

A 403(b) plan is a retirement savings vehicle primarily for employees of public schools, certain healthcare organizations, and tax-exempt entities under Internal Revenue Code Section 501(c)(3). It functions similarly to a 401(k), allowing pre-tax salary contributions into investment options for long-term growth. Contributions and earnings grow tax-deferred until retirement, when withdrawals are typically taxed as ordinary income. Some employers also offer Roth 403(b) options, where after-tax contributions lead to tax-free qualified withdrawals in retirement. A decrease in your 403(b) account balance can be concerning. This reduction in value stems from various factors, some inherent to investment accounts, others related to plan management and activity. Understanding these common reasons can clarify why your 403(b) might be experiencing losses.

Market Fluctuations and Investment Performance

A 403(b) account is an investment vehicle, meaning its value is directly tied to the performance of its underlying assets. The balance can fluctuate based on broader financial market movements. When the stock market experiences downturns or the bond market shifts due to factors like rising interest rates, investment values can decrease.

Market volatility, characterized by unpredictable price swings, is a normal part of investing. These fluctuations are influenced by economic indicators, geopolitical events, and investor sentiment. While a volatile market can lead to temporary paper losses, these dips do not necessarily signify permanent losses, especially for long-term retirement savings.

The specific asset classes in your 403(b) react differently to market conditions. Investments heavily weighted in stocks or stock mutual funds typically experience greater volatility and more significant declines during market corrections. Bonds and fixed-income investments are more stable, though their value can still be influenced by economic conditions like inflation or interest rate changes.

For those with a long investment horizon, market downturns can present opportunities for future growth when markets recover. Historically, financial markets have demonstrated a long-term upward trend, despite periods of decline. Therefore, short-term losses in a 403(b) often represent temporary reductions in value that can rebound over time.

The Effect of Fees and Expenses

Various fees and expenses are associated with 403(b) plans. These charges can directly diminish your account’s balance over time, regardless of market performance. Even small percentages can erode investment returns, as these fees are typically deducted automatically from your investment returns.

Administrative fees cover plan operation costs, including recordkeeping, legal compliance, and participant education. These can be a flat annual fee, such as $50 per participant, or a percentage of assets, ranging from 0.1% to 0.5% of your account balance. While employers may sometimes cover these, participants often bear some or all of these costs.

Investment management fees, often expressed as expense ratios for mutual funds or annuities, are another cost. Expense ratios typically range from 0.5% to 1.5% annually for mutual funds. Annuities might include additional fees like mortality and expense (M&E) fees, potentially exceeding 1%. These fees are paid to manage underlying investments and are deducted before returns are distributed.

Some plans may include sales loads, which are commissions charged when buying or selling certain investment products. Annuities, common in older 403(b) plans, can also carry surrender charges if funds are withdrawn or transferred before a specified period, often 5 to 10 years. These charges can be a percentage of the amount withdrawn, decreasing over time.

Other potential costs include transaction fees for specific investment activities or individual service fees for optional actions like taking a loan. Over decades, the cumulative impact of these fees can lead to a lower net account balance. For example, a 1% annual fee on a $100,000 balance means $1,000 less each year working for your retirement.

Investment Selection and Diversification

The specific investment options chosen within your 403(b) account play a role in its performance, including any observed losses. Different types of investments carry varying levels of risk and potential for return. For instance, aggressive stock funds are designed for higher growth potential but come with greater volatility, while conservative bond funds offer lower returns with less risk.

A portfolio heavily concentrated in a single sector, asset class, or small number of investments faces increased exposure to adverse events. Such a concentrated portfolio will experience more fluctuations and potentially larger losses during market downturns. This lack of broad exposure means poor performance in one area can disproportionately impact the entire account balance.

Conversely, a well-diversified portfolio spreads investments across various asset classes, industries, and geographical regions. While diversification does not guarantee against losses, it helps mitigate the impact of poor performance in any single investment by balancing it with others. This strategy reduces overall investment risk and can lead to more stable returns over the long term.

The composition of your 403(b) investments, whether by choice or due to limited plan options, directly influences how susceptible your account is to market swings. If your account holds highly aggressive or undiversified investments, it will experience more pronounced periods of decline. This characteristic of the chosen investments can explain why your account might be showing losses during certain market conditions.

Account Activity and Its Impact on Balance

Actions taken by the account holder can directly reduce a 403(b) plan’s balance, independent of market performance or fees. These personal financial decisions deplete the account’s assets, impacting its overall value. Understanding the consequences of these activities helps maintain retirement savings.

One direct cause of a reduced balance is withdrawals from the account. Whether hardship withdrawals, early distributions, or regular distributions after retirement, each directly removes principal and accumulated earnings. For instance, early withdrawals before age 59½, not meeting specific exceptions, are generally subject to ordinary income tax and an additional 10% early withdrawal penalty from the Internal Revenue Service (IRS).

Taking a loan from your 403(b) also impacts your available balance. While the loan amount is typically repaid with interest, the money borrowed is no longer invested. This means loaned funds miss out on potential investment growth or earnings they would have accrued. Most 403(b) loans must be repaid within five years, though terms may extend up to 15 years for a primary residence purchase, with payments made at least quarterly.

A reduction or cessation of contributions to your 403(b) can slow or halt the account’s growth. Regular contributions, especially those benefiting from employer matching, are a primary driver of account accumulation. When contributions decrease or stop, the compounding effect of earnings on new contributions is diminished, delaying the recovery of the account balance.