As important documents have become ‘paperless’ within the past decade, most of us neglect to review them on a regular basis. Recurring pay stubs, monthly bills, insurance policies, and investment account statements often go unseen, as many of them are only accessible online. As an advisor, I notice that 401(k) statements are often neglected until a big market scare, exactly when it’s not appropriate to make changes! I like to say ‘don’t make improvements to your boat during the middle of of storm.’
Awareness of these accounts can provide clarity to our financial landscapes and future decision making, so I decided to turn this article into a financial wellness exercise – fun! I browsed account statements from 10 different 401(k) plan providers, and have summarized what to look for and how to interpret the data. I would like for you to access your latest account statement and follow along. Go ahead and find or reset your account password, log in, and let’s take a look!
These statements are often cluttered with verbiage and disclosures we simply ignore, but they can provide insights about our financial discipline and progress towards retirement savings goals.
Top of the Statement: You will see your personal contact information, the name of your 401(k) plan, the statement period (quarterly or monthly), your date of hire, and likely the logo of the plan recordkeeper – this company directs and keeps track of your account transactions, and may or may not be the custodian of your funds – which is where your assets are ‘held.’
Account Overview/Balance: This shows your opening and closing balance for the given investment period (quarterly, etc.). You might see a vertical calculation: Beginning Balance + Employee and Employer Deferrals + Rollovers + Investment Earnings or Loss – Withdrawals – Fees = Ending Balance. If you took out a 401(k) loan, your issuance and interest details will be included. Your account balance changes every day, so you should pay more attention to the long-term trends and investment allocation than to the exact dollar amount.
Side Note: Do NOT take out a 401(k) loan without completely understanding the risks and consequences.
Vested Balance: If your employer contributes to your account through profit sharing, you may be subject to a vesting (ownership) period. This means that if you leave your job too soon, you will be able to take all of your employee contributions with you, but may have to forfeit all or some of the employer contributions (plus earnings on that portion). Your 401(k) plan may feature either cliff vesting (100% vested after up to 3 years of service) or graduated vesting (increasing % each year up to 6 years of service). If your ending balance and your vested balance are the same, that means that you will not have to forfeit any of your account balance when you leave your job. The employer contribution (ER) may be also shown as a ‘safe harbor contribution,’ meaning that your employer provides at least an effective 4% match (100% of the first 3% of compensation, then 50% of the next 2%) or a non-elective 3% contribution (no employee contribution required) to meet 401(k) testing requirements – safe harbor contributions are immediately 100% vested. These contributions help to retain employees and allow highly-compensated employees to maximize their retirement savings. Include your vested balance when calculating your savings rate.
A 4% employer match is equivalent to 2 weeks of extra pay! Do NOT leave free money on the table!!
Investment Allocation: You will likely see a pie chart that shows the weight of each investment (fund) relative to the portfolio as a whole. Your ‘contribution allocation‘ shows your current investment election and your ‘current allocation‘ shows the actual investment ratio as of the closing balance. Make sure the investment allocation is appropriately aligned with your risk tolerance, risk capacity, and time horizon (how long until you will need the money).
Asset Allocation: This pie chart shows how your portfolio is diversified across investment asset classes, each with their own risk and return expectations.
Your 401(k) investment options may include the following asset categories:
- Large-Cap Value/Blend/Growth
- Mid-Cap Value/Blend/Growth
- Small-Cap Value/Blend/Growth
- Foreign (Non-US) Developed Markets
- Foreign (Non-US) Emerging Markets
- Global/World (Including US) Markets
- Real Estate
- Other Specialties (Technology/Health Care/Utilities)
- US Bonds (Government/Corporate/High Yield)
- Global Bonds
- Target-Date Portfolios (Retirement Year)
- Target-Risk Portfolios (Conservative/Moderate/Aggressive)
Portfolio Rate of Return: This percentage shows how much your investment portfolio has grown over a given period, as specified on the statement. This return metric is ‘time-weighted,’ meaning that your contributions and withdrawals are not considered in the rate of return. On the other hand, a dollar-weighted return would include the inflows and outflows, corresponding to the total change in your account balance. Your statement may include a nifty line graph, hopefully moving up and to the right over a long period.
The formula to find your time-weighted rate of return for a given period is:
((Beginning Balance + Investment Gain or Loss) / Beginning Balance) – 1
The formula to find your dollar-weighted rate of return for a given period is:
(Ending Balance – Beginning Balance) / Beginning Balance
Investment Performance Summary: A full list of the plan’s investment options shows the investment performance of each fund, including the funds you did not elect. Keep in mind that past investment performance is not an indication of how the funds will perform in the future. The performance data may only go back as far as 10 years, which is not an appropriate representation of a fund’s long-term history or potential. This summary also ignores risk, which is equally important. Simply said, investments with greater total risk (measured by standard deviation) should have a higher expected return, and vice versa.
Fees: The general administration of your 401(k) plan may be paid in part by you! You might see itemized administrative charges listed on your statement. Your investment options (usually mutual funds) also have internal expenses not shown on your statement, and may include sales charges and 12b-1 fees (commissions paid to an advisor), fund management fees (paid to the mutual fund company), and other administrative costs. If you want to dig deeper and learn more about the internal fees you pay, you can analyze your funds by ticker using a site like Morningstar or ask your plan advisor directly. Fees can make a substantial difference in the long-term performance of your retirement accounts, so be diligent in your research.
If you have questions about your 401(k) plan, ask your plan administrator (HR department or boss) for a copy of the Summary Plan Description (SPD). This document provides details about your plan’s eligibility, contributions/rollovers, vesting, and in-service distribution rules (loans, hardship withdrawals, in-plan Roth conversions). If you want to know more about the investment options, ask your plan administrator if your plan has a dedicated investment advisor to help you align your risk tolerance with your risk capacity. The plan administrator and investment advisor have a fiduciary responsibility to act in the interest of the plan participants, so do not hesitate to ask questions or request more information about your plan.