If you keep up with the rapid-fire commentary coming from President Donald Trump’s Twitter account, you know that your 401(k) is beautiful. In fact, its value has risen beyond your wildest expectations.
Except maybe that doesn’t ring true for you. Your 401(k) might have even lost money over the last year. Should you be concerned?
Although no one likes to see their future retirement funds dwindle, there’s no need to panic just yet. Here’s how to tell if your 401(k) is on track despite less than impressive growth and what to do if it’s not.
The Tricky Task Of Evaluating Your 401(k)’s Performance
It’s easy to assume your 401(k) isn’t performing as well as it should be when you compare it to certain market indicators or even other investors’ portfolios. The problem is that wouldn’t be a fair comparison. One portfolio can look “better” or “worse” than another when there’s no context.
“That’s like asking if Kim Kardashian’s skinny jeans look good on Michael Jordan,” said Pamela Horack, a certified financial planner and founder of Pathfinder Planning. “Different workers have different contribution rates and different allocations. But, more important, they have different savings goals.”
For example, say there are two workers of the same age. One is single and wants to retire early. The other plans to work for 35 more years and has a spouse who will receive a pension. If both workers earned the same returns each year, it wouldn’t necessarily mean they’re both on track to meet their goals. For the saver with a long-term savings goal, a 6 percent annual return would be perfectly acceptable. But for the early retiree with only 10 working years left, that would probably be too low.
“There are some times when the S&P will do better than a well-diversified 401(k) and sometimes when it’ll do worse.”
Evaluating your 401(k)’s performance based on indices like the S&P 500 is also not an apples-to-apples comparison. “A well-diversified 401(k) has stocks in large companies and small companies, U.S. companies and international companies ― not to mention a whole chunk devoted to bonds,” said Britton Gregory, a financial planner and owner of Seaborn Financial. The S&P 500, he explained, is made up only of large U.S. companies.
“There are some times when the S&P will do better than a well-diversified 401(k) and sometimes when it’ll do worse,” Gregory said.
In order to make a true comparison, you would need to weigh your portfolio against another portfolio that has a similar asset allocation, and examine both their long-term returns and long-term volatility. “Websites such as Morningstar might be able to help you create such a benchmark, and certainly investment managers often have internal tools that do the same,” Gregory said.
At a minimum, you should be receiving quarterly account statements that outline your overall investment performance based on the funds you’re invested in within the plan, said Crystal Rau, a certified financial planner and owner of Beyond Balanced Financial Planning. “By comparing your performance against a [reference point] that matches your allocation, it can give you a general idea of how your 401(k) is performing.”
What To Do If Your 401(k) Loses Value
So what should you do if your portfolio isn’t performing to your needs or expectations? It depends on the underlying reason. And often, it’s something you can’t control.
That’s because the market is cyclical. “Over the long-term, the growth is positive, but in the short-term there’s a boom-and-bust cycle that will cause occasional negative returns in even the best 401(k),” Gregory said. And the more aggressively you’re invested in equities (namely, stocks), the more volatility you can experience within your 401(k).
Market volatility is certainly something we’ve experienced a lot of lately. Last October, both the S&P 500 and the Dow Jones Industrial Average reached all-time highs. Unfortunately, that was short-lived; they posted a decline of 6.2 percent and 5.6 percent, respectively, for 2018. In fact, 2018 was the first year ever that the S&P 500 ended up down after rising for the first three quarters.
It’s important to remember, however, that every time you contribute money to your 401(k), you are buying shares of certain investments, and it’s the value of those shares that changes. “You’re not actually losing money until you sell a fund and lock in those losses,” Rau said. That’s why selling off investments when they’re down is usually the last thing you want to do, since there’s a good chance the value will recover.
The point is, it’s normal to see the value of your 401(k) go up and down. If your 401(k) lost value because of short-term market volatility, and you’re confident in your current asset allocation, then you should simply ride it out. It’s when that volatility becomes too much for you to stomach that you should go back to the drawing board and ask yourself how much risk you’re really comfortable with.
“You may find that you’ve invested too heavily in equities or you’re in a fund that has been underperforming for quite some time,” Rau said. “It’s important to always start with an asset allocation that you’re comfortable with ― the split between equities and fixed income ― and from there you can choose how to diversify.”
If you do believe that something is off, or you simply aren’t sure, it doesn’t hurt to consult with a professional.
Hiring a financial planner to look at your portfolio might sound like an expensive proposition, but it doesn’t have to be. There are many advisers who provide services at an hourly rate, in addition to the traditional assets under management (AUM) model, where an adviser charges a percentage of your total portfolio value each year. Gregory recommended checking the Garrett Planning Network and XY Planning Network to find an adviser who does hourly consulting.
If you go this route, a financial planner can perform an audit of your 401(k) allocation (and consult with you on anything else you’d like) for as little as a few hundred dollars. And if that’s the price of a better-positioned portfolio ― or the peace of mind that everything’s up to par ― it’s well worth it.
Before You Go
