Peak to Valley Is Not How to Measure 401(k) Success

401(k) account balances are up for workers who have participated for less than four years in their plans (EBRI). Because their account balances are relatively low, their contributions and their company’s contributions offset the recent declines in equity and bond values and magnify the impact of dollar cost averaging.  For others, their accounts have declined, sometimes substantially. However, these declines have not resulted in a loss in the value of the amount actually saved by most participants in 401(k) plans. The benefit of employer contributions, dollar cost averaging and market returns up to this time provide a return on employee saving that is not reflected in an evaluation that judges 401(k) performance by comparing 401(k) values at market peaks with market bottoms. To determine your 401(k) rate of return, get your old W-2s, total what you have contributed, and compare the difference between your contribution and your current account balance.

David