How to Review a 401(k) Statement

As financial documents have become paperless within the past decade, most of us neglect to review them regularly. Periodic pay statements, monthly bills, insurance policies, and investment account statements go unseen, as many are only accessible online. We often neglect retirement plan statements until the stock market drops, typically when making investment changes is inappropriate.

Statements are cluttered with financial jargon and disclosures we may ignore, but they can also provide valuable insights about our progress to and through retirement. To prepare for this article, I reviewed 401(k) statements from 10 different companies to share how to interpret your own. You may access your account statement or follow along with our shared example. Let’s dive right in!

Top of the Statement: You will see your personal contact information, the name of your 401(k) plan, the statement period (usually quarterly or monthly), your hire and plan participation date, and the logo and contact information of the plan recordkeeper. The recordkeeper directs and tracks your account transactions and may also be the custodian of your funds – where your assets are held for your benefit. Your employer does not have custody of your retirement savings. What a relief!

Account Overview/Summary: Your beginning/opening and ending/closing balance are displayed for the investment period (usually quarterly). Your statement may include a vertical calculation: Beginning Balance + Employee and Employer Contributions + Rollovers + Change in Market Value – Withdrawals – Fees = Ending Balance.

Vested Balance: You may be subject to a vesting period if your employer contributes to your account through profit sharing. 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 the 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, you will not have to forfeit any of your account balance when you terminate employment. It’s all yours!

The employer contribution (ER) may also be shown as a safe harbor contribution, meaning that your employer provides at least an effective 4% match (100% of the first 3% of compensation, plus 50% of the next 2%) or a non-elective 3% contribution (with no employee contribution required). The safe harbor allows the plan to meet testing requirements related to the treatment of highly-compensated employees. These contributions are immediately 100% vested!

Employer Match Note: Your employer’s contribution is more than a small percentage of your income, and it is helpful to think about money in terms of time. For example, a 4% match may seem small, but it is equivalent to over two weeks of additional pay in the current year. Assuming you work for 25 years and receive a 4% match along the way, growing at 8% annualized, the employer contributions will provide nearly three years of gross pay in retirement! Here is a chart showing the time-equivalent value of various employer match percentages:

Contribution Summary: You may think of your 401(k) account as one large pool of money, but your plan recordkeeper is separately tracking your employee pre-tax, after-tax, and Roth contributions, your employer’s pre-tax contributions, and the earnings on each portion. When determining whether to make traditional (pre-tax) or Roth (after-tax) contributions to your 401(k), review the 12 advantages and disadvantages of both options to make a well-informed decision.

Investment/Asset Allocation: The statement includes a pie chart that shows the weight of each investment fund relative to the total portfolio. Your contribution election displays how your future deposits will be allocated across your selected investments, and your current allocation shows the actual fund weights as of the ending balance.

Asset Allocation: This pie chart shows how your portfolio is diversified across investment asset categories, each with its own risk and return expectations.

Your 401(k) investment options may include the following asset categories:

  • Large-Cap US Value/Blend/Growth
  • Mid-Cap US Value/Blend/Growth
  • Small-Cap US Value/Blend/Growth
  • Foreign (Non-US) Developed Markets
  • Foreign (Non-US) Emerging Markets
  • Global/World (Including US) Markets
  • Real Estate (REITs)
  • Sectors (Tech/Health Care/Utilities)
  • US Bonds (Gov./Corp./High-Yield)
  • Global Bonds
  • Target-Date Portfolios (Risk Capacity)
  • Target-Risk Portfolios (Risk Tolerance)

Personal Rate of Return: This percentage reflects the performance of your investments over a given period. The return is time-weighted, meaning that your account contributions and withdrawals are excluded from the rate of return. On the other hand, a dollar-weighted return would include the inflows and outflows, reflecting the total change in your account balance.

Your time-weighted rate of return for a given period is:

((Beginning Balance + Investment Gain or Loss) / Beginning Balance) – 1

Your dollar-weighted rate of return is:

(Ending Balance – Beginning Balance) / Beginning Balance

Investment Performance Summary: Your statement may include a list of the plan’s investment options and respective fund performance. When reviewing the various fund options, remember that past investment performance does not indicate how the funds are expected to perform moving forward. These return summaries usually exclude important details about risk. I enjoy researching fund options and their historical risk/return metrics on Portfolio Visualizer.

Fees: Itemized administrative costs may be listed on your statement. Your investment options (usually mutual funds) also have internal expenses, which include sales charges, 12b-1 fees (commissions paid to an advisor), and fund management fees (paid to the mutual fund company). To learn more about the internal fees, you can analyze your funds using a site like Morningstar. These combined costs can make a substantial difference in the long-term performance of your retirement accounts.

How to Measure Twice & Keep Finance Personal

To fully understand your employer’s 401(k) plan, ask your plan administrator (or HR department) for a copy of the Summary Plan Description (SPD). This document details your plan’s eligibility requirements, contributions/rollovers, vesting, and in-service distribution rules (loans, hardship withdrawals, in-plan Roth conversions).

Ask your plan administrator if there is a dedicated investment advisor to help you align your risk tolerance with your risk capacity when choosing your funds. The plan administrator and investment advisor have a fiduciary responsibility to act in the best interest of the plan participants, so do not hesitate to ask questions or request more information about your retirement plan.

Review your retirement accounts individually but also together as a total portfolio, ensuring that each account is playing a different role but collaboratively aligned with your family’s unique objectives and desired outcomes.

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