If you participate in a 401(k) plan, you should regularly evaluate the performance of your overall portfolio and the progress you’re making toward accumulating retirement savings. To do this analysis, you need to consider:
How much your account value has increased or decreased
What percentage of the change is the result of contributions you and your employer have added to the account
What percentage of the change is return, or the result of growth or decline in the value of your account investments, including reinvested earnings
How each of your investments has performed in relation to the others and to its appropriate benchmark
The regular statements you receive from your plan provider will include most of the information you and your investment professional need to assess your situation. If you own mostly mutual funds, you can also use a copy of each fund’s fact sheet and annual prospectus, which will be available online and in print from the provider.
What influences performance?
All investment markets tend to move in cycles, providing strong returns in some periods and weaker ones in others. If you have most of your 401(k) assets in stock and stock funds when the stock market is flat or falling — as it is from time to time — the likelihood is that the return on your portfolio will mirror the market in those periods. Similarly, when the stock market is rising, the value of your stock investments should increase as well. The same is true of bond investments, though the strongest bond returns often occur when stocks are weak, and vice versa.
If your investment choices are actively managed, as many mutual funds and variable annuity funds are, the decisions the managers make will affect returns as well. Managers generally aim to beat the relevant benchmark by choosing investments they think will outperform the pack. However, what’s of greater concern is a failure to do as well as the benchmark. With individual investments, internal management decisions also play a major role in whether or not an investment provides solid returns.
The plan fees and expenses and those that apply to the investments you select, which are subtracted from your account value — also reduce your return. The more modest they are, the less impact they have.
