401(k) Returns: Personal Rate, How to Calculate, & More

By Justin Pritchard, CFP®

Your 401(k) is one of your most important assets. So, it’s crucial to understand how your account is doing and what factors affect your performance most.

Any changes in your account value come from two sources:

  • Any money you add or withdraw, including fees
  • Investment gains or losses

Your additions and withdrawals are pretty straightforward. You can see contributions—including employer matching and profit-sharing additions—on your account statements and pay stubs. Withdrawals are also hard to miss. But investment results are more complicated.

Continue reading below, or get similar information from this video.

Personal Rate of Return

When available, a “personal rate of return” is the easiest way to understand your investment performance. You should also evaluate the returns from your investments separately, but your personal returns are important.

The personal rate of return describes your account’s performance as an annualized rate of return. This is different from the published rate of return on investments you choose because a personal rate of return accounts for the timing of any contributions or withdrawals. Unlike the returns shown for each of the options in your plan’s menu of investments, the personal rate is specific to your account.

Your personal rate typically accounts for investment returns in light of:

  • Additions
  • Withdrawals
  • Investment gains or losses
  • Fees

When you use a workplace retirement plan, you add to your account every pay period. With each new contribution, you automatically buy into a portfolio of investments. But those investments might fluctuate over time, so you buy at different prices every pay period.

Timing Matters

The investments themselves have performance information telling you how they performed over a given period (the last one, three, or five years, for example). But you didn’t necessarily buy into the investments on the exact beginning date.

That timing issue is critical. The only way to truly understand your personal rate of return is to track each purchase. With details about how much went into your account compared to your current balance, you can start to understand how you’re doing.

You might think in terms of investment vs. investor returns:

  • The investment refers to the fund or portfolio you use, and you can review how those investments performed whether you use them or not.
  • The investor is you. Your return depends on when you bought, any transfers or sales, and other activity.

Again, returns are typically annualized. So, the number you see shows results as if you earned the same amount every period. For instance, assume you’re looking at a five-year rate of return, and the result you see is 5%. It’s unlikely that your returns were level—you probably didn’t earn exactly 5% every single year. Instead, you probably earned more than that in some years, less in others, and even had losses at times. But when you average everything out, the average annual return was 5%.

Your 401(k) Provider

It’s hard to track your contributions with every pay period. Fortunately, your 401(k) provider probably does it for you.

The leading retirement plan providers have been showing investors a personal rate of return for years. Look for your personal rate when you log in to view your accounts, and check account statements for this information.

You can often track your return over various timelines. For example, you might want to know how you’re doing year-to-date (YTD) or over the past three to five years. As you might imagine, short periods don’t always tell you much, as markets can fluctuate, but longer periods can provide valuable insight.

How do they calculate your personal rate of return? It varies depending on the provider, so you really need to review the support information and disclosures to understand the assumptions involved. Vendors sometimes use a money weighted return or an internal rate of return (IRR).

Beyond the Personal Rate

While your personal return is important, it’s smart to just look at the raw returns of the investments you use. That information can help you decide if you’re using the right investments. If you only look at personal returns, the waters are muddied by timing

You don’t necessarily control timing in your account. You probably contribute to your 401(k) every pay period, and you’re not making decisions based on how investments are performing. By removing the noise of timing and looking at the investments themselves, you can learn more about the tools you’re using.

It’s easy to look up investment returns for a given fund. Your 401(k) website or statement might even show returns for all of the investments in your plan’s menu.

Once you understand how your account is doing, you might wonder if that’s normal?

What Is the Average Rate of Return in 401(k) Plans?

Investment returns depend on how much risk you’re taking, when you buy and sell, the specific investments you use, and more. Some claim that the average return ranges from 5% to 8% per year, but there’s no good way to quote a single number. Every investor is different, so returns are all over the board.

It would be nice if there were a simple answer, but there’s not. Fortunately, there are at least two sources you can consult for insight.

The most recent data from Vanguard shows a personal rate of return of 4.2% per year over the most recent 5-year period available. But that information is a little dated.

It was negative 15.9% for the previous 1-year period. That study also tells us that on average, investors in 401(k) plans have about 80% to 90% of their accounts in stocks. But you might not have that much stock—most people approaching retirement don’t.

Plus, we have to ask how useful that information is. That five-year period was unique, and the future may be different. Naturally, we need to make some assumptions as we plan for the future, but it’s best to hold on to those assumptions with a loose hand.

What’s a Good Rate of Return?

A good rate of return depends on recent market performance. To evaluate your returns, compare your personal rate of return to market indices like the S&P 500, an Aggregate Bond Index, and other markets that are similar to your investments.

Be sure to account for risk. If you have a portfolio that’s 60% global stock and 40% bonds, the S&P 500 is not an appropriate comparison because it’s 100% U.S. stocks. You’re not comparing apples to apples. You can find suitable benchmarks for comparison online, such as Morningstar’s 60/40 index.

As you review those numbers, remember that you cannot invest directly in an index, and fees will reduce your returns. 401(k) plans typically charge administrative, recordkeeping, and other charges, so keep that in mind.

Unfortunately, there’s really no way to know what a “good” return is in advance. The only question you can answer is whether you got reasonable returns given whatever the market delivered.

If markets rose sharply, you might hope to have high returns. If markets fell, you might hope to have lost less. But ultimately, you might just be along for the ride. As long as you use an appropriate risk level and investment strategy, you don’t necessarily need to compare your returns. “You get what you get,” as they say.

Knowing what’s most important to your success is also critical. For example, the rate of return you earn might be less important than how much you add to your account each year if you’re trying to catch up on retirement savings.

Because the future is uncertain, the best you can do is choose investments wisely and go along for the ride. As with many things in life, you can make decisions and plans, but only time will tell what the results are.

What Affects Returns?

Your investment returns primarily depend on how much risk you take, the timing of any investments, and fees in your account.

  • Risk: How much is in stocks vs. bonds vs. cash? A bigger allocation to stocks is higher on the risk/return spectrum. As a result, you might have higher returns, but you might also have large losses or flat returns.
  • Timing: You might have gains or losses depending on when your contributions hit your account (and when you move into or out of different investments). In general, timing the markets is difficult to achieve consistently over long periods. But you might be relatively lucky or unlucky as a long-term investor.
  • Fees: Expenses can reduce returns. Costs are probably less important than the two factors above, but they can be relevant. With small accounts, flat-dollar fees may take a bigger bite out of your assets. With large balances, high percentage-based fees can add up to sizable costs.
  • Investment selection: This probably gets the most attention. The specific investments you choose might affect your returns. But the role of individual securities might (or might not) be smaller than you think. In many 401(k) plans, you have a limited menu of investments. Still, you might have the option—for better or worse—of choosing to favor certain areas of the markets.

Why Is My Rate of Return Negative?

If you have a negative return, your current account value is less than you put into the account over time. The most common causes are investment losses and fees in your account.

Most investments gain and lose value over time. It’s normal to have a negative return over short periods, and ideally, your account will recover over the long term. Unfortunately, there’s no guarantee that that will happen. You might need your money soon, which could prevent the account from recovering.

For instance, during one-year periods, it’s very reasonable to have losses. But over five or ten-year periods, losses are less likely, although anything is possible, and past performance does not guarantee future results.

Chart showing market and portfolio returns over longer and shorter periods

Your account balance can continue to grow—even with negative returns—due to new money you add to the account. But it’s critical to choose your future investments carefully. It may be smart to continue using the same investments, even though they lost value, but be wary of sticking to a losing strategy.

You might be in an appropriate portfolio if you are:

  • Taking a reasonable amount of risk
  • Broadly diversified
  • Using low-cost funds, when available

But it may be worth re-evaluating your strategy if you are:

  • Timing the market
  • Changing investments frequently
  • Making bets on specific stocks or sectors

In cases where you have a negative return but you were avoiding risk (keeping all of your money in a money market fund, for example), the cause is most likely fees. 401(k) plans have a variety of fees that can draw funds from your account. See my video on the topic.

How to Calculate Your 401(k) Return

Most people don’t need to calculate their returns. If you decide to pursue this, you need to be very careful unless you’re a math whiz, and it’s important to question why you’re calculating your own returns.

The return in a given year is an uncontrollable result of your choices. It makes sense that you want to evaluate the impact of your choices, but specific numbers aren’t necessarily more helpful than general information.

You can calculate some numbers, but perhaps the most important thing is to evaluate the drivers of performance in each account. Review the following items and more:

  • Investment options available in each account: Are they active or passive? Do they use specific strategies?
  • Underlying fees of those options: What is the annual expense ratio? Are there loads, redemption charges, or other costs?
  • Additional account fees: Are any recordkeeping, advisory, or other fees applied to your account?
  • Risk level: How much is in stocks vs. bonds? Are the holdings broadly diversified or concentrated? Does one account have credit risk while the other has duration risk?
  • The specific exposure in each account: Are the sector weightings equivalent (technology, healthcare, etc.), and are international weights the same?

Calculating an investment return to three decimal places might feel like a productive exercise. But evaluating the factors above might be more useful. You might get just as much information by looking at general information about stocks vs. bonds or U.S. vs. international investments.

Investment Return Calculators

The easiest way to calculate your 401(k) return yourself is to use an online calculator.

Example: The two links below are pre-set with the assumptions below.

  • You started with $50,000
  • You added $1,000/month
  • You invested for 10 years
  • Your current balance is $250,000

What was the return?

Start with this calculator to estimate the return, which is 5.879%. You should always cross-check any calculations to verify that you’re getting good numbers. You can do so by running the numbers in reverse (ask how much you’d have in 10 years if you earn 5.88%) using the SEC’s investment calculator.

Remember that there may be multiple ways to calculate returns. This is just one of them.

Should You Calculate Your Returns?

Before going down the rabbit hole of various calculations and time periods, it’s important to identify what you’re trying to accomplish. For most people, the basic question is, “Am I going to be okay?”

For example, say you want to compare two accounts to see which one is performing best. One approach is to calculate the return of each account and favor the one with highest returns going forward. But this might lead you astray.

Or, let’s say there’s a market crash. You log in to your account, and you lose sleep after seeing your new—smaller—account balance. It probably doesn’t matter if the account lost 28% vs. 35% in that case. The real takeaway is that you were surprised. Maybe you didn’t realize that this was possible, or maybe you were taking more risk in the account than you have the appetite for. Those takeaways are far more valuable than a number.

401(k) vs. IRA Returns

Returns in IRAs and 401(k) plans should be similar, assuming you take a similar amount of risk. But fees can reduce returns, and one account or the other might have more attractive fees. For example, 401(k) plans typically have recordkeeping and administrative costs that don’t apply to IRAs. Also, there might be a limited menu of investments in a 401(k) plan—for better or worse—that reduces your investment options.

Important: There may be several ways to calculate performance. You must familiarize yourself with all of them, including pros and cons, before making important decisions. Tools and calculations featured here are for illustrative purposes only, and there is no endorsement of the tool’s provider or methodology. This material is introductory in nature and is not sufficient to provide deep expertise on this complicated topic. Calculate at your own risk.

Any performance numbers shown are for illustrative purposes only, and do not suggest that the firm can produce those results for clients. Investor returns depend on timing, risk levels, security selection, luck, fees, and more. Past performance does not guarantee future results. You can and almost certainly lose money investing, at least temporarily. You might not be able to recover from losses before you need to use the money.