People often hear that “the market returned X%” and then look at their 401(k) statement and wonder why their own account did something very different.

That does not necessarily mean the 401(k) failed. A 401(k) is a tax-advantaged account that can hold many different investments. Your personal result depends on what you owned, what you paid, when money went in or came out, and how you reacted along the way.

A 401(k) is not the S&P 500

A headline return for the S&P 500 describes one index. Your 401(k) may hold a target-date fund, international stocks, small-company stocks, bonds, stable-value funds, cash or a mixture of several categories.

A diversified portfolio is intentionally different from an all-stock U.S. large-company index. In years when the S&P 500 is unusually strong, a diversified retirement account can lag it. In a severe stock decline, that same diversification may reduce losses.

Fund expenses and plan fees reduce the return you keep

The U.S. Department of Labor explains that 401(k) plans can include investment-management expenses, administrative fees and individual-service fees. Investment expenses are commonly deducted directly from investment returns, meaning the number credited to your account is already net of those costs.

The SEC’s Investor.gov also emphasizes that even relatively small recurring fees can have a large cumulative effect because money paid in fees is no longer compounding for you.

That is why it is worth reading your plan’s participant fee disclosure and looking up the expense ratio for every investment you own.

Your personal return is affected by when you contribute

Suppose a market index rises 10% over a calendar year. You did not necessarily have your entire year-end balance invested on January 1. Payroll contributions arrived throughout the year, so later contributions participated in only part of the year’s return.

This creates an important distinction between a fund’s time-weighted return and the return experienced by an individual investor with cash moving in and out.

Target-date funds are designed to do a different job

Many 401(k) participants use target-date funds. These typically hold a diversified mix of stocks and bonds and gradually change that mix as the target retirement year approaches.

If you compare a target-date fund to the S&P 500 during a strong stock market, the target-date fund can appear to “underperform.” But that comparison ignores the fund’s broader allocation and risk objective.

Cash and conservative allocations can create a performance gap

Some participants become more conservative after a market decline and then stay in cash, stable value or bonds while stocks recover. Others choose conservative funds because they are close to retirement. In either case, their account should not be expected to produce the same return as an aggressive stock index.

Buying high and selling low can overwhelm the plan design

The plan can offer perfectly reasonable investments and still produce disappointing personal results if the participant repeatedly moves out of stocks after declines and back in after recoveries.

One reason a written investment and retirement-income strategy matters is that it gives you a framework for what you will do before the next frightening market move arrives.

Employer match can be valuable even when investment returns disappoint

Investment performance is only one part of the 401(k) value proposition. Employer matching contributions, tax deferral or Roth treatment, automatic payroll saving and institutional investment options can all be important advantages. A disappointing investment period does not erase those benefits.

Compare the correct numbers

If you want to understand whether your account is actually underperforming, compare each investment to a relevant benchmark over the same time period and then account for fees. Do not compare a balanced fund or target-date fund directly to a 100% stock index and conclude that the difference is automatically a failure.

Also separate three questions:

Investment performance: Did the funds perform reasonably relative to appropriate benchmarks?
Plan cost: Are fund expenses and plan fees competitive?
Retirement outcome: Is the current balance and allocation actually on track to support the income you will need?

The retirement-income question is bigger than the statement return

A 401(k) balance can look strong and still leave unanswered questions about sequence-of-returns risk, future income, taxes and how much market exposure you want near retirement.

That is where a retirement-income review can be useful. The goal is not to declare the 401(k) good or bad. It is to determine what job each portion of your savings should do.

Want to see what your current plan is actually doing?

King Life can help organize your current holdings, fees, risk exposure and retirement-income goals so you can see where the gaps are before making changes.

Request a Retirement Income Review

Educational information only. Past performance does not guarantee future results. Diversification does not assure a profit or protect against loss. Consider investment objectives, risk, fees, taxes and liquidity before making changes to a retirement account.