The Most Important Number on Your 401(k) Statement (It’s Not Your Balance)

Your 401(k) balance is important, but it’s not the best indicator of whether you’re on track for retirement. Instead, your rate of return tells you how efficiently your investments are growing over time. A strong return means your money is working harder for you—regardless of short-term market fluctuations.

Understanding this number can help you make smarter decisions and maximize your savings. Here’s why your rate of return matters, how to interpret it, and what to do if yours seems a bit low.

Why Rate of Return Matters More Than Balance

Your 401(k) balance only tells you how much money is in your account today. It’s a snapshot in time. Your rate of return, on the other hand, reflects how your investments have performed over time. It accounts for market fluctuations and is typically calculated on an annual basis. Even if the market dips, a solid rate of return means you’re still on track.

“I don’t want to minimize the importance of balance because, ultimately, if your balance isn’t big enough, you may not be able to spend enough,” said Chris Kampitsis, a Wealth Advisor and Financial Services Executive at Barnum Financial Group. “But rate of return ultimately indicates how hard your money is working for you. As investors, we want our money compounding, earning interest, and growing over the years.”

Common Misconceptions About Rate of Return

Many investors misjudge their returns, often comparing them to others or to benchmarks like the S&P 500. Here are some common mistakes:

• Comparing returns to coworkers: Different asset allocations and risk levels mean individual returns will vary.
• Benchmarking against the S&P 500: If your portfolio isn’t 100% stocks, this comparison doesn’t give you a full picture.
• Panicking over short-term drops: Long-term growth matters more than daily or yearly fluctuations.

“Very often investors will focus on their rate of return in comparison to the person at the cubicle or office next to them. They might compare in comparison to a benchmark like the stock market, i.e., the S&P 500. But they don’t necessarily give context to their particular asset allocation,” Kampitsis explained. “So that’s not a fair measuring stick to hold yourself to.”

How Risk Tolerance and Life-Stage Factor Into Your Rate

Your personal comfort level with risk tolerance and the stage of life you’re in can directly influence how aggressive or conservative your portfolio should be.

You may face a choice between taking on more risk for higher long-term returns or opting for a more conservative approach that sacrifices some growth for stability.

“In general, our rate of return should compensate us for the level of risk we’re taking on over the long term,” Kampitsis explained. “A more aggressive, more equity-focused investor should have a higher long-term rate of return, but they will also have much more deviation from that long-term average in any one or two given years.”

What to Do If Your 401(k) Rate of Return Seems Low

If you’re concerned about your rate of return, consider these steps.

Review Your Investment Choices

“Number one, we want to figure out why it’s under-performing,” says Kampitsis. He recommends that investors look at their invested funds and how each is performing versus their benchmarks, not just the S&P 500. Also, check if your plan includes high-fee or under-performing funds.

“Most 401(k) plans have fiduciary oversight, so funds should be monitored for reasonable fees and performance,” says Kampitsis. “But it’s not always the case. Not every menu is going to be perfect. Some funds will under-perform, that’s just how that works.”

Assess Your Asset Allocation

Make sure your investment mix aligns with your risk tolerance. Asset allocation refers to how your portfolio is divided among asset classes, like stocks, bonds, and cash. Be cautious with target-date funds as they may shift too conservative, too soon.

Focus on the Long-Term Goals

Your 401(k) is designed for decades, not short-term gains. Try to avoid “emotional investing,” which can lead to buying high and selling low.

“What is your distance to retirement and how long do you anticipate your retirement lasting once you’re there? While some of your money you will spend the first day of retirement, it’s important to remember that this is still a very long term journey,” Kampitsis warned.

Taxes, Fees, and Other Hidden Factors

Even a strong rate of return can be eroded by fees and taxes. 401(k) fees reduce your earnings over time, especially if your plan has high expense ratios. Taxes on withdrawals can also impact your net income, especially if you’re in a higher tax bracket.

“Fees are definitely a major component because ultimately that does represent a drag on our rate of return that, when compounded over many years, is a substantial number,” Kampitsis noted. “Taxes similarly can ultimately be a huge impediment to us netting the right amount of money that we need.”

The Bottom Line

Your 401(k) rate of return is one of the most important numbers on your statement because it shows how effectively your money is growing. Rather than comparing your returns to others, focus on your own investment mix and long-term goals.

If your returns seem low, take a closer look at your fund choices, risk level, and fees. To reduce the impact of taxes and fees, consider Roth contributions and diversification.

If you review your 401(k) regularly and make thoughtful adjustments, you can stay on track and build a more secure retirement.