One of the most effective ways to build wealth is your 401k, but set expectations.

401ks are one of the most effective ways to build wealth, especially with a generous employer contribution in the form of a match or profit-sharing award, or ideally both. Combined with a strong plan, it's critically important to build an effective employee education & engagement program. Part of that plan involves setting & communicating realistic expectations for employees. This builds trust, confidence, enthusiasm, and credibility… and sets the stage for a highly successful plan. 

There are short-term speculators (gamblers) and long-term investors. A 401k plan is the latter.  The fundamentals of wealth building and 401ks, in general, are not “get rich quick schemes.” A 401k plan is a long-term proven program that requires discipline and patience. Human nature is drawn to the new shiny object or the magical silver bullet. Short-term thinking and our shrinking attention span run counter to building wealth and maximizing your 401k. If someone asks about the latest hot stock tip, they’re headed down the wrong path. 

So, what do you share with employees and participants to help set expectations?

There are many messages to communicate that go well beyond the scope of a short blog post. However, one message I’ve found that gets great traction and surprises people (pleasantly) is as follows:

Question:

Over a 10-year time period, what is the percent chance your 401k account will be positive, double, triple, or quadruple?  Purely based on just investment results, not additional contributions.

Answer

10-year results over 88 years from a leading active mutual fund family has produced the following results. The value of an investment over 10-years has a: 

99.7% of being positive

79.3% chance to at least double

49% chance to at least triple

22% chance to at least quadruple 

Results like this require selecting the right funds AND allowing those funds to operate uninterrupted. Meaning, don’t shoot yourself in the foot by trying to time the market. Be patient & confident in your funds and allow the talented group of people managing your funds to do their thing.  

It’s been fun to share these results and message with many 401k participants. I always let people guess  the answers before I share the actual results. The guesses are almost always much worse (less optimistic) than the actual results. Example - Over a 10-year time period, what is the percent chance your 401k account will be positive? The normal response or guess is somewhere between 50 & 80%.   

These results are statistically relevant, meaning there is a large enough sampling of 10-year periods ( 88 years & over 570 periods ) to make these results realistic. However, past performance is no guarantee of future results. See footnotes for details of this study.   

Sharing simple information like this has a powerful impact on plan participants and goes a long way toward helping build highly successful plans.    

As a good friend of mine used to always tell investors & his clients, “Money makes money and the money, money makes, makes more money.” Thanks Clay! 

Albert Einstein famously referred to compound interest as the 8th wonder of the world. 

Matt Ward - June 8, 2023

*Source -What makes American Funds different -2022 edition: Class A shares

In good times and bad, an 88-year track record of success in equity funds. Over the years, investors have looked to us to provide superior long-term outcomes. The reason becomes apparent when you look at our equity funds’ results over 576, 10-calendar-year periods since our first fund began in 1934 (as shown in results chart).

Based on results calculated at net asset value with all distributions reinvested. Reflects applicable fees and expenses.Based on Class A share results for rolling calendar periods through December 31, 2021. Periods covered are the shorter of the fund’s lifetime or since the comparable Lipper index inception date (except Capital Income Builder and SMALLCAP World Fund, for which the Lipper average was used). Expenses differ for each share class, so results will vary.