How to Calculate a 401(k) Annual Return

Monitoring your 401(k) plan performance is a critical step in retirement planning and ensuring you are on track to meet your goals. Knowing your annual rate of return is part of this planning. Though your 401(k) statement may break down the returns for you, a basic knowledge of how to calculate the return on investment will help you understand the statement information.

Calculate Investment Performance

To calculate your 401(k) annual return, you must calculate the investment performance. This includes any capital gains or losses on your account and also any dividends that any stocks or mutual funds held inside of the account earn. If your account is primarily invested in mutual funds, the gains for each fund should be shown on each statement, either quarterly or monthly. The same is true if you hold investments in fixed-rate or more conservative bank-style investments.

Total Expenses

Expenses for a 401(k) are broken down into two different types. Individual mutual funds and other investments have their own expenses, which are for managing the investments, including buying and selling the individual securities and paying the fund managers. The 401(k) plan will have its own expenses for the management of the plan as well. Individual investment expenses already may be figured into the return on investment for each individual investment, but in some cases, these expenses will be shown separately on the statement. Expenses for operating the 401(k) plan are usually shown separately on the statement.

Account Balance

You will need your account balance at the beginning of the year in order to calculate your annual return on investment. Your balance will increase throughout the year if you make regular contributions, and you must subtract these contributions from your ending balance so as not to skew the return numbers.

Reporting Return

You figure the dollar amount of your return by subtracting the expenses from your investments and the expenses incurred for managing the plan. If you do not account for all of these expenses, your return will look better than it is. To express the return as a percentage, divide the amount of the return after expenses by the total balance of the account at the beginning of the year.