4 steps to protect your 401k

Take that deep breath

If you stop contributing to your retirement plan now, you'll miss out on compounding -- that wonderful phenomenon that lets you generate earnings from your investments' previous earnings. And you could miss out on free money if your employer matches your contributions.

If you panic and cash out your account entirely, you'll have to pay a 10% early-withdrawal penalty if you aren't 59 1/2. Distributions, regardless of your age, are taxed as regular income. Plus, people who pull their money out of the market in a panic not only sell at the wrong time, they often buy back in when prices are too high, Brodeski cautions.

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Instead, use market volatility as a wake-up call. "Every investment plan, even a 401k, requires periodic maintenance," Bergquist says. "If you are not invested in something like a target fund that automatically reallocates your retirement portfolio, now is probably a good time to make sure you are allocated properly."

Picture yourself at retirement time if the current volatility occurs again: Would your portfolio be positioned to handle it?

Ask your employer for help

You don't have to fly solo during these tough times. Thanks to a change in the law in 2006, employers can now provide investment advice to employees who participate in 401k's and similar plans.

So check with your employer to see if your plan administrator can offer guidance. A recent Charles Schwab survey found that 401k investors who used some type of plan-offered advice earned annual returns about 3% higher than do-it-yourselfers, Bergquist says. "This can make an even bigger difference in a tough market environment."

This article was reported by Cameron Huddleston for Kiplinger's Personal Finance Magazine.

Updated Sept. 3, 2009

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