KnowHow Archive

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Helping participants make sense of those retirement plan statements

Particularly with the resurgent 2003 markets, participants are likely to find some good, or at least "better," news in those retirement plan statements. Of course, many actually will have fared better than they expect over the past several years—after all, few are fully invested in a Nasdaq-only sector fund or even 100% in an S&P 500 index option.
Still, soft equity markets over the past three years have dampened the enthusiasm that used to accompany the arrival of that statement for many participants. This month's Know How attempts to put the statement data in a different perspective.
First, it deals with the calculation of a rudimentary rate of return for the participant's investments, using just three numbers from the statement: the beginning balance, earnings recorded during the period, and worker contributions. With the latter, we employ the traditional half-weighting that, even if it does not strictly adhere to your payroll cycle, offers a workable result for most situations. Participants will derive more value from this exercise with access to comparable returns for benchmark investments for the funds in your program.
Second—and this may be different from calculations you have seen or used previously—we try to recognize the impact of the employer contribution as an investment "gain" to the account. Certainly, that number cannot be compared fairly to a benchmark investment such as the S&P 500. Still, it is a real benefit to the account, it certainly adds value, and it is a gain to the account based on the participant's decision to save—in the very same way that an investment in a mutual fund would be. As always, we look forward to your feedback. 
Nevin Adams