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Old 01-14-2008, 10:16 PM   #21
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I wouldn't cancel the meeting. I'd want to hear their reasoning about why it is set up like that.
good call, gindie...and I agree on not canceling the meeting.
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Old 01-14-2008, 10:36 PM   #22
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Originally Posted by clifp View Post
Seriously, if Youbet's explaination is correct, this is fairly unusual most 401K funds like Dodge and Cox operate like a funds in an IRA cap gains and dividends increase the total number of shares you hold.

.
Unusual? I'm not sure about that. Can you point to any examples?
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Old 01-15-2008, 03:26 AM   #23
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Originally Posted by youbet View Post
Unusual? I'm not sure about that. Can you point to any examples?
I can not claim to have looked at a lot of 401K, but the ones at my work place, Brother In Laws work palce, and ex girlfriend worked as follow.

Say you owned 100 shares of VFINX (institutional) @130 in your 401K. At the end of the year Vanguard distributed $2/share in dividend and some small amount of capital gains.

Your statement would show a distribution of $200. The $200 would be reinvested at the new prices of $128 and would purchase an additional 1.5625 share. So at the beginning of the year you'd have 101.56 shares worth $128/share.
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Old 01-15-2008, 08:21 AM   #24
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Here is an interesting document that explains this process in the case of one particular retirement plan.

Plan Design Consultants, Inc. - 401(k) Retirement Plans

Maybe your 401K provider needs some encouragement to provide better written information concerning the plan accounting.
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Old 01-15-2008, 08:25 AM   #25
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Here is another example:

Why is the mutual fund price on my statement not what I see in the newspaper?
Shares of the mutual fund and the units in your account are similar, yet different. Both represent ownership of the fund, but one is a direct ownership and the other is an indirect ownership. The mutual fund price in the paper represents direct ownership. Because your investment is in a retirement account sponsored by your company, certain adjustments to the mutual fund price are required. The value of the units in your account is generally the mutual fund net asset value adjusted for dividends, capital gains, fees, and rebates that occur over time.

From:

EBP 401k
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More great information
Old 01-15-2008, 09:40 AM   #26
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More great information

dbr,

Thanks for the 2 links to 401K plan information, especially the one on Plan Design Consultants, Inc. - 401(k) Retirement Plans. Great stuff. Maybe I'm getting ahead of myself but I am starting to feel I now know or understand how our 401K plan works than the 401K company admn or the bank VP 401K plan trustee.

Again, when you ask as I did the bank VP (401K plan trustee) who is our company’s main contact for our retirement plan how earnings are managed within the 401K and get responses like "I don't know. I'm not an accountant but will be happy to refer your question to our Trust Acctg Department" or "Look at it this way; at least you had $4.49 in earnings for 2007 when the stock market had a rough year." Yikes!! This is our plan trustee. Again, this is referring to DODGX with a 401K plan balance of $151,766. Those kinds of responses caused me to raise my eyebrows and want to dig a little deeper for answers. Fortunately, I found all the answers I think I need with the help of everyone in this forum.

Thanks,

Retire63
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Old 01-15-2008, 10:22 AM   #27
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401k's generally structure funds like this so they can have different expense structures. We have discussed this before.

My best example was a Motorola stock fund in the Motorola 401k. It was a fund, not a direct stock holding, but it held only MOT stock. We had a long period of steady holding with no additional contributions while I tracked the fund using the MOT stock price in Quicken. Our number of of shares in the fund never changed, but the calculated equivalent MOT shares very slowly decreased as the fund subtracted expenses. So I had to periodically correct the fund value in Quicken.

Almost any 401k fund that does not have a NAV that matches the retail version of the fund will behave the same way. You are paying for the 401k management.

Dan
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Old 01-15-2008, 10:34 AM   #28
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Originally Posted by Retire63 View Post
... or "Look at it this way; at least you had $4.49 in earnings for 2007 when the stock market had a rough year." ....
Tell your plan trustees that the stock market did not have a rough year in 2007. Everything was up about 8% which is an average year and very far from a "rough year". Then ask them where the 8% went.
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Old 01-15-2008, 12:28 PM   #29
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  1. I found out that there really are 2 different kinds of 401K plans. Those that reinvest earnings and buy more shares and others that increase the NAV of each share. Why one is chosen over the other is beyond me.
This had been puzzling me because I thought all 401k plans worked like clifp describes in his post above. But after reading dbr's second post and Animorph's post I remembered something and now it all makes sense.

Retire63, there really is only one kind of 401(k) plan (well, there's Roth 401(k)'s now, but that's not what we're talking about here, so ignore those for the moment), but there can be (at least) two different kinds of investments within the 401(k) plans: mutual funds and unit investment trusts.

Mutual funds inside of 401(k)'s act just like they do in your IRA: as distributions happen, they usually buy new shares. The NAV reflected in your 401(k) should match the NAV in your IRA and the price you'd find in the newspaper or in any online quote service.

Unit investment trusts are a little bit different animal. You can think of them as a private mutual fund that buys shares of another mutual fund. So, for example, you might have a "Dodge and Cox UIT" that buys shares of the mutual fund DODGX. This has a couple of different implications. First, the price of a single share of the UIT will not resemble at all the NAV of DODGX -- meaning the price of the UIT might be $24.87 per share when the NAV of DODGX is $133.07 a share; over time of course you would expect the relative performance of the two to track each other. Second, the distributions of the mutual fund could be transparent to the UIT; under the hood what happens is that DODGX pays the UIT the distribution according to how many shares the UIT holds, then the UIT turns around and buys more shares of DODGX with that distribution. The number of UIT shares that each 401(k) participant owns doesn't increase, but the NAV does. Third, because the UIT has management expenses of its own and there is no active management of the UIT itself, the performance of the UIT will lag, by its expenses, the mutual fund itself.

As Animorph points out, you can have a UIT that only invests in a single company's stock as well. I think this is the more common case, and it's usually the employer's stock that is done this way. For example, when I worked for HP, they had an HP UIT in their 401(k) plus a bunch of mutual funds that behaved in the "normal" way.

2Cor521
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Old 01-15-2008, 01:09 PM   #30
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Originally Posted by clifp View Post
I can not claim to have looked at a lot of 401K, but the ones at my work place, Brother In Laws work palce, and ex girlfriend worked as follow.

Say you owned 100 shares of VFINX (institutional) @130 in your 401K. At the end of the year Vanguard distributed $2/share in dividend and some small amount of capital gains.

Your statement would show a distribution of $200. The $200 would be reinvested at the new prices of $128 and would purchase an additional 1.5625 share. So at the beginning of the year you'd have 101.56 shares worth $128/share.

Looks like we are both working from a knowledge base consisting of only a handful of anecdotal examples! I have solid knowledge of only three plans: DW's, DS's and mine. All work as Animorph and 2Cor521 described.

As I mentioned earlier, the key thing for me is that I get performance approximately equal to the underlying fund or index. Whether I get distributions in the form of additional shares or as increased NAV of existing shares makes no difference whatsoever.
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Old 01-15-2008, 01:19 PM   #31
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Very helpful description from SecondCor 521.

I could add that another possibility is a commingled investment trust that is not associated with investments in a particular retail fund but is handled strictly as an institutional fund. I imagine your S&P 500 fund is like this. In such case the investment company managing the fund has created a non public tradeable fund that is marketed to your (and other) 401k providers. The accounting would be similar to desccribed above. If it is an index fund you could compare the fund performance to either a proxy index fund or to the index itself, allowing for dividends to be added. Note, in tracking fund NAV's for public funds dividends are usually not included.
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Old 01-17-2008, 05:35 AM   #32
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Final Thoughts

To all:
First, let me make one thing very clear. I never ever thought that my company or the bank were doing anything fraudulent or unethical. I just did not understand how the earnings were accounted for in my 401K.

What started the whole thing was this. A co-worker commented in late Dec 07 that she was discouraged by the price performance of the DODGX stock in the 401K plan. I said that while it had not been a good year stock price wise for value funds such as DODGX, she shouldn't worry too much as D&G had published projected 2007 4th qtr earnings in November on their website and the earnings per share were huge. 8% per share and 73% higher than 2006.

And sure enough, on Dec 28th, the fund went X-dividend and Dec 31st, D & G reinvested the earnings to buy more shares in both my DODGX IRA and taxable accounts. So I went looking to see how many shares were purchased in my 401K plan and there were none.

When I inquired as to “what happened to the earnings” in my 401K Dodge & Cox Stock fund and was getting nowhere with a answer through the company and bank channels, I came to this forum.

I believe that some of information provided by forum members could be consolidated into a clear written explanation for employees as to how earnings are handled in our 401k plan. That is where I believe our 401K administrators and bank representatives could improve on things. When they just say they don’t really know how earnings are handled in the our plan as they are not accountants, it is somewhat disconcerting to say the least.

One of the best suggestions provided in the forum for determining if your 401K plan is valued correctly when earnings are added to the NAV of each unit was this. Just take the beginning share price and compare it to the ending share price for the selected period.

When I did that for the 401K plan S & P 500 fund for 2006, the unit/share price increased by 15.82% and the actual S & P 500 index increased 15.79%. So simple. Works for any holding in the plan. If I try to calculate the return based on the total beginning and ending balances, it is impossible due to contributions and sometimes reallocation of money from one fund to another.

Anyway, I now feel confident that my balances are correct and I know how my earnings are handled in my 401K plan. Oh, I did notify the company plan administrators and bank VP’s via email that I had my questions clearly answered via a 3rd party and that the meeting could be cancelled. Never heard another word from them. Maybe they are still researching.

Thanks again to everyone for your help.

Retire63
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