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401(k) Statements May Surprise Investors in July

Here’s how to put depressed account balances and the new lifetime allocation illustration into perspective.

Sinking stock and bond markets have taken a toll on the account balances of 401(k) plan participants this year. As participants review their accounts midyear, they’ll also find a new feature on their account statements: an illustration of the estimated monthly income they’ll receive in retirement based on the current account balance. 

In this video, Christine Benz discusses:

• How to evaluate your 401(k)’s performance in 2022
• What the lifetime allocation illustration is on your 401(k) statement

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. 401(k) plan participants may receive some surprises when they review their midyear statements. Joining me to discuss what those surprises might be and how to cope with them is Christine Benz. She is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. It's great to see you.

Dziubinski: Let's start out with the obvious. Many investors are going to be seeing red ink when they review their statements midyear. What should they be bearing in mind as they're assessing the damage?

How to Evaluate Your 401(k)’s Performance in 2022

Benz: Well, I think, life stage matters a lot in this context. So, for people who are still fairly early in their investing careers, and I would say, this would be anyone under age 50, say, remember that these down markets are really your friend because they provide an opportunity to add more shares to your account at the same outlay than would have been the case when the market were higher. So, try to tune out the noise. If you can, switch to paperless statements so that you're not receiving physical statements. Really try to ignore the red ink because, truly, down markets are an opportunity for you. For older investors, down markets are more worrisome because there may be real implications for how you want to position your portfolio and also how much you can take out when you're retired, assuming that retirement is quite close at hand.

Dziubinski: What if a 401(k) investor wants to get a context for how their portfolio is doing and for those losses? How can they get a sense of what a good benchmark is or whether their portfolio maybe is doing better than it might actually look?

Benz: A starting point for thinking about this is thinking about a 60% equity, 40% bond portfolio. As of this recording, we're here in late June period, such a portfolio would have been down about 19%. So, if your portfolio's asset allocation is in that same general ballpark, you're probably in a pretty normal zone. If your losses are higher than that, say, 19%, 20% for the year to date, it may be because your portfolio has a more aggressive asset allocation. If you're a young investor, you probably should have more in your portfolio than 60% in stocks. Think about your asset allocation as a framing device. Recognize that if you have a higher equity allocation than that 60/40, you'll be in for bigger losses. If you're closer to retirement and you have a lower equity allocation, then your losses may be relatively more muted. I would also say, use this as an impetus to check up on your portfolio's asset allocation. If you haven't looked at this recently, I think a target-date fund can be a good way to benchmark the reasonableness of your portfolio's asset allocation.

Dziubinski: And then, how about for investors who might want to dig deeper down to the individual investment selection level and figure out what helped and what hindered during the period? Any tips for them?

Benz: I love the idea of setting up a custom benchmark that mirrors your portfolio's asset allocation. You don't need to get too granular in terms of allocating X amount to small value, for example, but just the baseline asset allocation. Set up a simple portfolio—you can use Morningstar.com for thisthat is composed of inexpensive exchange-traded funds or index funds. That's a way to gauge on an ongoing basis: "Well, I'm doing a lot of monkeying around with my portfolio. I have a lot of individual stock holdings or fund holdings or whatever it might be." That's a good way to benchmark whether you're adding value with all of that activity. If at the end of the day you're not really beating that simple, inexpensive, low maintenance benchmark, maybe it's impetus to rethink your plan.

What the Lifetime Allocation Illustration Is on Your 401(k) Statement

Dziubinski: Christine, there is a new development in 401(k) plan statements. Many investors are going to be seeing for the first time on this upcoming statement how much income their portfolio value would provide them in retirement. Give us a little bit of background on why investors are now going to be seeing this on their statements and then what they can do with that information.

Benz: This is a new Department of Labor regulation. It's going into effect for the second quarter of 2022. And I do think the goal is a worthy one. The basic idea is to help participants take their 401(k) balances, which I think can often seem like an abstraction, and help them figure out whether it's enough to provide them with the funds that they need in retirement. You'll see two figures as part of this new metric. The first would be what your current balance would buy in terms of annuity, monthly annuity incomes, to cover your life only as well as your life and a survivor. So, the second number will typically be lower because it's covering both lifetimes. But I think it's a good starting point, at least, for helping participants determine whether they've saved enough. We often see that people aren't good judges of whether they've in fact saved enough for retirement. This is intended to give them a little bit of a helping hand.

Dziubinski: Then, how should investors use these numbers, Christine?

Benz: I would say it depends on your life stage. So, if you're very young and early in your investment career, even if you're in your 30s, 40s, maybe even early 50s, don't get too worried about this. If you see a low number, remember it's being calculated off of a low balance because we have had a little bit of a shakeup in the equity and bond markets so far this year. But also remember that you have many years that you will continue to contribute to your portfolio. So, it will compound and grow over the years. I would just focus on that, focus on what you can do on the contribution-rate front, make sure your asset allocation makes sense given your life stage, but otherwise not spend too much time on it.  

On the other hand, if you are closer to retirement, I think these numbers can be a meaningful starting point for thinking about the adequacy of your retirement fund. So, you want to start by thinking about your income needs in retirement. Think about how much of those income needs, your total income needs, will be met through nonportfolio sources. So, do a little bit of work on Social Security's website to see what kind of payout you'll expect from Social Security. And then, you can look at this anticipated income stream from your portfolio. You can see whether you can do some work to help elevate that balance between now and retirement. And get some help. I think, especially as retirement draws close, it's so advantageous to sit down with someone who is really steeped in the specifics of retirement planning.

Dziubinski: Christine, thank you for your time today and for giving us some perspective as we open the email with our statements in it or tear open the good old-fashioned paper statement. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.