Your 401(k) investments put you into the action of the stock and bond markets. The returns from these types of investments will vary significantly, with periods where your account value goes down to times in the market when you feel like a genius because your 401(k) account is growing so fast. To evaluate the relative returns of your plan, you need to do what the pros do -- use a benchmark.
Contributions vs. Investment Returns
Digging out the actual investment returns inside of your 401(k) may be a challenge. Along with the gains or losses from the investments, your account receives your salary reduction contributions and the matching funds from your employer. A benefit of the monthly investment schedule is that you will be buying shares of the selected funds during the down market periods as well as during the good times. This regular investment schedule could allow you to earn better returns than the numbers published by the fund companies.
A Benchmark Gives You a Basis
Professional money managers compare their results to a benchmark. This is an unmanaged index or indicator that shows what the average return of an asset class -- such as stocks or bonds -- was for a certain period of time. The S&P 500 index is widely used as a stock market index. The return results of an exchange-traded fund based on the S&P 500 provides a useful benchmark to compare with the stock funds in your 401(k). If you own bond funds in the retirement account, use the returns from a total bond market ETF as your benchmark.
Finding Your Investment Returns
The custodian of your employer's 401(k) plan will send out quarterly statements showing your account value. At the same time, you should receive performance results for the different funds offered as investment choices. Compare the results of the funds you are using in the 401(k) plan with the returns of the benchmarks you chose. It is very possible that the 401(k) plan includes S&P 500 and total bond market index funds as investment options. If this is the case, you have all the information you need to evaluate your individual 401(k) results against the stock and bond market averages. If your overall 401(k) returns are meeting or exceeding these benchmarks, you have a good return rate.
Most Dogs Have Their Day
Be aware that different sectors of the stock and bond markets will have their own cycles of better and worse performance results. As a younger investor with years to go before retirement, you might be putting your 401(k) money into small company and tech stock funds. Another part of your account could be in energy and/or natural resources funds. On the bond side, high-yield funds give the younger investor more potential in exchange for higher risk. To evaluate these funds, you need to compare your overall results with the selected benchmarks, using several time frames such as one, five and 10-year periods. Quarterly results will not give you much useful information.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.