[401k] Employer Contributions and returns: contrib. or gain?

[JustinR]

When calculating your portfolio's return, do you consider employer contributions part of the "contributions" or do you just treat it as part the gains?

I'm leaning towards the latter since they're not your contributions.

[Boglenaut]

When calculating your portfolio's return, do you consider employer contributions part of the "contributions" or do you just treat it as part the gains?

I'm leaning towards the latter since they're not your contributions.

They are not investment gains. They are contributions made on your behalf by your employer as comepensation for labor.

By the way, I do not calculate my portfolio returns.

[JustinR]

When calculating your portfolio's return, do you consider employer contributions part of the "contributions" or do you just treat it as part the gains?

I'm leaning towards the latter since they're not your contributions.

They are not investment gains. They are contributions made on your behalf by your employer as comepensation for labor.

By the way, I do not calculate my portfolio returns.

Well, that's the problem I'm facing. Theoretically I agree with you but when you do calculate your returns this becomes a practical problem.

[telemark]

It depends on why you're calculating the return. If you're thinking about changing the asset allocation in your 401K and you want to evaluate how well the current choices are working, you should count them as contributions. If you're thinking about reducing your 401K contribution and investing the money somewhere else instead, you should count them as gains.

[Default User BR]

When calculating your portfolio's return

I don't. It's not, in my opinion, useful or actionable information.


Brian

[livesoft]

Employer contributions are contributions and not gains.

I believe it is useful to calculate the performance of one's portfolio and compare it to a benchmark in order to know if one is helping or hurting themselves by the way they perform the following actions:
(1) tax-loss harvesting
(2) rebalancing
(3) adjusting asset allocations on RBDs and shortly thereafter.

[Rainier]

They are contributions.

[Calm Man]

OP, this is no different than looking at your taxable portfolio< which might include say a gift from your parents. Would you consider the gift to be gains? Or going back to your 401K example, assume you contributed nothing and the employer put in 3% of your salary. If you counted the employer contribution as gains, well you have an infinite gain.

[leonard]

They are contributions. Not return.

[FinancialDave]

Well, that's the problem I'm facing. Theoretically I agree with you but when you do calculate your returns this becomes a practical problem.

Well, I just don't see what the practical problem is.

In the first place most companies that offer 401k's should calculate your PRR (personal rate of return) for you. My fidelity account lets me calculate it YTD, monthly, or on any other custom time frame.

If you want to do the calculation yourself most firms will allow you to download a transaction list of all the ins, outs, dividends etc and you can run your own Excel XIRR on the period if you don't believe what the fiduciary tells you. Once you get the download all you need to do is filter out the "internal" transactions such as dividends and interest, so that the XIRR can work on only the cash flow in and out of the account. It makes no difference whether the cash flow comes from you or the employer, as far as the return on the account goes.

I just tried this on my own Fidelity 401k with a list of YTD transactions -- It took all of about 10 minutes, but of course it seems that Fidelity may not be using exactly the XIRR formula, because I got a YTD of 31%, when Fidelity is reporting 24.8% thru the same time frame (12/28/12). Now I guess I need to figure out why - unless someone knows the exact formula Fidelity uses.


fd

[Clever_Username]

In the first place most companies that offer 401k's should calculate your PRR (personal rate of return) for you. My fidelity account lets me calculate it YTD, monthly, or on any other custom time frame.

My employer's 401(k) does this, but the formula it uses to determine gain is absurd. (current balance - contributions) / contributions = percent gain or loss.

It counts the company match as a contribution in that formula, though.

[dhc]

I just tried this on my own Fidelity 401k with a list of YTD transactions -- It took all of about 10 minutes, but of course it seems that Fidelity may not be using exactly the XIRR formula, because I got a YTD of 31%, when Fidelity is reporting 24.8% thru the same time frame (12/28/12). Now I guess I need to figure out why - unless someone knows the exact formula Fidelity uses.

I'm also mystified by Fidelity's formula, but in my case they consistently report a higher rate of return than XIRR gives me.

As for the original question - it seems clear to me that employer contributions are just a type of contribution, no?

[JustinR]

Ok thank you for all of your opinions.

I agree now, employer contributions are considered contributions. The return shouldn't be about my personal financial performance, but how well my portfolio did. Also, I'm sure that's how the 401k carrier calculates returns as well.

[jaj2276]

When calculating portfolio returns, you should absolutely consider them contributions.

If you're comparing investments however, you should treat them as returns.

For example if you wanted to know whether you should contribute $10k to your 401k or invest $10k in Opportunity Y, then your 401k expected return should be calculated as ( match + [investment gains or losses]) / $10k. Opportunity Y's return is just (investment gains or losses - [taxes paid on this $10k that aren't paid if given to 401k] / $10k.

Of course this just means that Opportunity Y needs to be a grand slam of an investment for you to even consider it given the "returns" you'll get from your 401k matching.

[FinancialDave]

I just tried this on my own Fidelity 401k with a list of YTD transactions -- It took all of about 10 minutes, but of course it seems that Fidelity may not be using exactly the XIRR formula, because I got a YTD of 31%, when Fidelity is reporting 24.8% thru the same time frame (12/28/12). Now I guess I need to figure out why - unless someone knows the exact formula Fidelity uses.

I'm also mystified by Fidelity's formula, but in my case they consistently report a higher rate of return than XIRR gives me.

As for the original question - it seems clear to me that employer contributions are just a type of contribution, no?

dhc,
Do you take out the lines with dividends and interest?

[dhc]

dhc,
Do you take out the lines with dividends and interest?

I do. My methodology:

• Export transactions year-to-date.
• Get rid of everything that is not a contribution (I'm still in the accumulation phase, so everything else is internal).
• Add current value with today's date (negative).
• Add value as of 1/1/12.
• Compute XIRR.

XIRR gives me a return of 12%. In the Year-to-Date Change tab, Fidelity shows a Personal Rate of Return of 18%. Statements currently don't seem to be working, so I can't tell if that makes a difference.

During the middle of the year, I'd think perhaps the difference could be attributed to XIRR being annualized (maybe Fidelity's PRR isn't?), but when the period in question is the whole entire year, I'm just mystified.

[FinancialDave]

dhc,
Do you take out the lines with dividends and interest?

I do. My methodology:

• Export transactions year-to-date.
• Get rid of everything that is not a contribution (I'm still in the accumulation phase, so everything else is internal).
• Add current value with today's date (negative).
• Add value as of 1/1/12.
• Compute XIRR.

XIRR gives me a return of 12%. In the Year-to-Date Change tab, Fidelity shows a Personal Rate of Return of 18%. Statements currently don't seem to be working, so I can't tell if that makes a difference.

During the middle of the year, I'd think perhaps the difference could be attributed to XIRR being annualized (maybe Fidelity's PRR isn't?), but when the period in question is the whole entire year, I'm just mystified.

Dhc,
That is exactly what I did, other than sorting the table to put the 1/1/12 date on top - my XIRR as of last Friday gives me 31.3% and Fidelity says the PRR is 24.8%. IF I put the dividends back in my XIRR drops down to 25.1%, which is what you would expect (dividends make it look low). The only difference is I had two very sizable withdrawals during the year, that if they are not doing a specific cash flow analysis may be the reason.

I have a call into Fidelity for details on their calculation - maybe something will shake out, but it may not be until next week.

fd

[dhc]

I have a call into Fidelity for details on their calculation - maybe something will shake out, but it may not be until next week.

fd

Do let me know what you discover!

Anyone else see an error in the way fd and I are calculating returns?