Average 401(k) Return: What You Can Expect

Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees. Sometimes broader trends can overwhelm these factors. For example, the S&P 500 fell by nearly 20% in 2022 while bonds had their worst year on record. This article will explain these points in-depth so you can aim for the best returns from your 401(k). We can also assist you in finding a financial advisor to potentially help you create a personalized retirement plan.

Average 401(k) Returns Don’t Tell the Whole Story

According to Vanguard’s 2023 “How America Saves” report, the average 401(k) balance for Vanguard participants in 2022 was $112,572, down approximately 20% from 2021 when the average balance was more than $141,000.

But every 401(k) plan is different. Some people contribute a minuscule 1% of their income, while others contribute 401(k)s up to the limit every year. Meanwhile, some investments perform drastically better than others. To grasp what you can expect from your 401(k) plan, you need to understand some key points. We’ll examine these below.

Get a Better 401(k) Return With the Right Asset Allocation

Your plan may offer a vast investment menu with plenty of funds to choose from. But no matter how you build your 401(k) portfolio, you should make sure its asset allocation aligns with your risk tolerance. It should also reflect your time horizon. This represents how much time you have between now and your expected retirement date.

Some financial planners believe those with long time horizons have time to weather market volatility. They could thus concentrate more on growth-focused, albeit volatile, investments like equities. On the other hand, those closer to retirement may want to protect the savings they already have. They also would want to take on less risk. Therefore, they tend to put more of their money in securities like debt and fixed-income.

This is the general idea that drives the structure of target-date funds (TDFs). These are common among 401(k) plan menus and are often the default option for participants who are automatically enrolled in their companies’ plans. In this case, your employer would put you in a fund named after your expected retirement year based on age. These funds automatically shift their asset allocation to seek less risk as you move closer to your expected retirement date.

Of course, TDFs can vary greatly across different fund managers. They’re also not the best options for everyone.

In any case, a financial advisor can help you build an investment portfolio that aligns with your individual risk tolerance, time horizon and financial goals. If you want a glimpse of what a proper investment mix may look like based on your risk tolerance, you can use our asset allocation calculator.

How Much Should You Contribute to Your 401(k)

The easy answer is as much as you can. However, the IRS sets 401(k) plan contribution limits each year. In 2024, you can contribute a maximum of $23,000, or $30,500 if you’re at least 50 years old. That’s up from $22,500 and $30,000 in 2023, respectively.

401(k) plan contributions are factored as an annual percentage of your annual income. Many financial planners suggest you should aim for 10% to 15%. It typically makes sense to contribute at least as much as your company 401(k) employer match, otherwise you are leaving money on the table.

Knowing how much you should contribute depends on your current income, your expected retirement date and how much you think you’ll need to support the retirement you want.

You can use our 401(k) calculator to determine how much you should contribute to your plan to generate the amount you need to support the retirement you want. In addition, our Social Security calculator can help you visualize how much you can expect in benefits.

But even if you contribute as much as you can to a well-diversified portfolio, another factor that can take a major chunk out of even the strongest investment returns is high fees.

Understand the Impact of 401(k) Fees

Just because your employer isn’t asking for out-of-pocket fees to run your 401(k) plan, it doesn’t mean you’re not paying them. These fees typically come out of your total assets, so they can seriously chip away at your returns if they’re excessive.

A recent report by the Securities and Exchange Commission (SEC) painted a vivid picture of how large even a seemingly small fee can be. The report indicated that over 20 years, a 1% annual fee cuts down the value of a portfolio by $30,000, compared to one with a fee of 0.25%.

What Are My 401(k) Plan Fees?

The 401(k) plan is a complex machine with plenty of moving parts, and fees could be hiding anywhere. But we’ll explain what to look for and where to find them. For starters, you can look into your 401(k) plan summary annual report. This document depicts the plan’s total assets and expenses. Another crucial document is your fund prospectus. This one details the costs associated with managing the mutual fund or funds that you’re invested in.

When reviewing these and other documents, these are some of the fees you should look out for.

Administrative Fees: These are fees associated with the overall management of your company’s 401(k) plan. They can include expenses for record keeping, legal representation and services offered to employees such as educational seminars.
Expense Ratios: This represents the portion of a fund’s assets used to pay for overall management and ongoing operation of the fund. The expense ratio comes out of a fund’s total assets, so you and everyone invested in the same fund pay indirectly via investment returns. Your fund prospectus should detail the expense ratio.
12b-1 fees: If present, these fees are factored into the fund’s expense ratio. 12b-1 fees generally pay for marketing of the fund.
Sales Loads: Also called transaction fees, these are expenses incurred when the fund manager buys or sells shares in your fund. There are two basic types of loads. Front-end loads are fees you pay when you buy shares of a fund and they come out of the initial investment. Back-end loads are charged when you sell shares after a certain amount of time. Some mutual funds have a mix of both, while others have none. It’s important to check with your fund prospectus to see if it carries any sales loads. Investors in a specific fund pay these indirectly through their assets as well. Sales loads are not part of a fund’s expense ratio.
Investment Advisory Fees: Also called account maintenance fees, these are ongoing plan costs associated with overseeing investment options. So if the plan administrator does plenty of research and other ongoing work into the structure of the investment menu in your plan, the fees will be high.

If all of these 401(k) fee designations sound a little difficult to wrap your head around, don’t fret.

You live in the modern world. There are plenty of online 401(k) plan fee analyzers out there. These tools let algorithms crunch the numbers for you. Some are free and some charge fees for some info.

Bottom Line

The average 401(k) return can only tell you so much. Yours will depend on personal factors. Does your investment portfolio have an asset allocation that’s right for you? Are your investments well diversified to weather market volatility? Do you have low-fee funds in your portfolio? These are the questions you have to ask yourself when you’re trying to get a grasp of what your annual return may look like. Online calculators can also help by providing a glimpse into how much you may need to contribute each year to reach your retirement goals.

Tips on Maximizing Your Retirement Savings

It can be difficult to put a light on what affects 401(k) returns. And you don’t want to be left in the dark, especially when you reach retirement and need your savings the most. A financial advisor can help you understand retirement and all of its moving parts. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
401(k)s are not only reliable retirement savings vehicles, but they also offer plenty of tax breaks, including some you may not know about. To help, we published a report on the 401(k) tax rules you need to know to make the most out of your plan.
You may find your company’s 401(k) plan may not be the best option for you. And you may get better investment choices and tax breaks if you open an IRA or a Roth IRA. To help you decide, we published studies on the best IRAs and the best Roth IRAs.