401K Plan - Income Distributions of $4.49 on a $151,766 account??

[Retire63]

Hello all,

I am new to this forum but hopefully some of the members will be able to help with my questions below regarding my 401K plan.

What am I missing here or don't understand?

I have a 401K plan that has a S & P 500 fund in it. Over a one and a half year period, I did not make any contributions to the fund. While the NAV (Net Asset Value) of the account increased, the number of shares stayed exactly the same. The period of time that the NAV increased was a recently good period for the stock market (2004 to 2006) so I am not surprised that the per share value went up.

But what I cannot understand and determine is what the dividends/capital gains were in my account and why, based on the principal of compounding by reinvesting income and capital gains to purchase additional shares, I did not receive even one additional share. This is a $100,000 account by the way. All of my IRA's with different mutual fund companies show income (dividends & capital gains) which are reinvested each year to purchase additional shares so that every year I have more shares working for me.

Also, I have another highly rated value stock fund (Dodge & Cox Stock Fund - DODGX) in the same 401K plan with $151,766 in it. Again, I did not make any contributions to this fund for the entire year (2007) and ended 2007 with same number of shares that I started out with at the beginning of 2007. The 401K plans website stated my total 2007 cash earnings were $4.49. Yes,that's right,$4.49. My Dodge & Cox Stock Fund (DODGX) IRA paid 4th quarter distributions (dividends & capital gains) of $4,552 on a balance of $54,116 which was all reinvested to purchase additional shares. Simple. My 401K Dodge & Cox 4th qtr cash earnings were $3.33. Of that amount, $.13 in cash earnings were credited to my D & G account on 12/17/07. Again, you're reading it right. $.13 cents!

Is this something I should be concerned about? If so, what steps should I take? My company plan administrator and the bank 401K trustee say everything is fine, They say I just don't understand how the plan works. No, I certainly do not understand how the plan works, that is for sure.

Don't all 401K stock plans work the same by reinvesting income (dividends & capital gains) to purchase additional shares that then earn more dividends/capital gains or is there some other way that dividends and capital gains are managed in 401K plans that I don't understand.

Confused and concerned. Any help or clarification on this matter will be very greatly appreciated.

Retire63

 

[tightasadrum]

I"m not an expert on this, but here are my thoughts anyway.

Do you have a Stable Value Fund in your elected funds where they could sweep dividends and earnings? An S&P Index Fund would maintain a specific alignment based on pre-determined capitaliztion formulas with the intent to make as few trades as possible to minimize costs. So earnings might be swept into another fund. Do you have a way to view cash flow histories of each fund throughout the quarter/year? If so, look for the earnings there.

BTW,I find the company's plan administrator's and bank trustee's comment that you just don't understand how the plan works very insulting. My question would be that ok, you're right, I don't understand. Hello, that's why I called you?? So mister smart guy, explain it to me in words that this lack of understanding investor can understand. And...show me where to see the numbers. (If they won't do this for you, I'd take it to the next level, even if it's to the regulators who police these clowns. )

 

[Retire63]

sweep dividends and earnings?

Tightasadrum,

Thanks for your reply. As far as a Stable Value Fund where dividends and earnings are applied to, if there is such a fund, I certainly do not have access to view it. The 401K plan overall had approx. $24 million in dividends and capital gains in 2006 per their annual summary.

When I asked our plan administrator and bank trustee how the dividends and gains were handled in the 401K plan, neither one could answer what I think should be a fairly simple question as they said they are not accountants.

But again, they said they were sure everthing was fine. The bank VP who is the 401K plan trustee contact said "look at it this way. At least you had $4.49 in earnings when the market had a rough year in 2007." At that point, I nearly dropped the phone. The $4.49 in cash earnings are on a $151,766 value stock fund that paid a 8% 4th qtr income distribution in my IRA.

Thanks again for your input.

Retire63

 

[LOL!]

Many 401(k) and 403(b) plans use a variable annuity wrapper around an underlying mutual fund. Many 529 plans are the same way. So unlike a standard mutual fund where distributions are made and you get an increase in shares, these 401(k) and 529 plans simply increase the NAV when the underlying mutual funds or investment increases in value.

A good example of this is the TIAA-CREF 403(b) and the CREF stock fund.

 

[Retire63]

variable annuity wrapper

LOL,

Now maybe I am getting closer to an understanding of where did the earnings go. But it just seems to me, that if there is a "variable annuity wrapper" around the fund where the earning are kept, then our plan admn and the bank trustee would know that off the top of their heads and could quickly explain that and show me how I can view how much from each of my funds was credited there.

I called the bank trustee again this morning and was told that their Trust Accounting Department has in fact been working on my question (How are earnings accounted for in our 401K plan?) since 1-4-08 and hoped to have an answer soon. Should it really take a Trust Accounting Department researching for over a week to answer this question. Seems puzzeling to me.

Also, if my number of shares never, ever increase and I make no further contributions to the Dogde & Cox Fund, then my current 2,025 shares valued at $74.95 ($151,774) would be worth $3,350 per share 30 years from now based on the 20 year average annual return of the Dodge & Cox Stock Fund. 14.18%

Is this correct?

Thanks for your input.

Retire63

 

[jIMOh]

Do you work for the company where the 401k is held? Who is the custodian of the 401k? Have you asked a co worker?

 

[Retire63]

401K Plan

jIMOh

Yes, I work for the company where the 401K plan is held. The plan admn is our company and the plan trustee is a bank.

I have not asked co-workers to explain to me how dividends and captial gains are handled in the 401K plan.

The way I see it is if our in house plan admn and the bank trustee cannot answer that question, I don't see how one of my co-workers will be able to. Just doesn't seem it should be that hard. Your S & P 500 account had X dollars in earnings in 2007 or 2006 and this is where you can see how much the earning were and your portion of the earnings that went to your account. There is a column on my 401K statement that says "earnings/losses" but I think this is more market price fluctuations than actual earnings. The figures jump all over the place from qtr to qtr depending on what the market is doing. "Earnings" up $39,000 next qtr down ($12,000). ??

Retire63

 

[gindie]

Retire63-

Unless I was missing something in your posts, when you compare the 2006 and 2007 year-end total amounts in the funds, did they increase by the same percentage as stated by the funds themselves (or Morningstar)? If so, then everything is fine and it is probably just a reporting gimmick by the 401K. Also, if this is the case, then the currently reported price per share by your 401K is probably greater than the actual NAV of the fund.

Just a thought.

 

[LOL!]

Also, if my number of shares never, ever increase and I make no further contributions to the Dogde & Cox Fund, then my current 2,025 shares valued at $74.95 ($151,774) would be worth $3,350 per share 30 years from now based on the 20 year average annual return of the Dodge & Cox Stock Fund. 14.18%

Is this correct?

That is correct. Note that the current NAV of DODGX is 133.02 and the NAV of DODBX is 78.98. Once again a good example of this is the TIAA-CREF CREF stock fund. A chart of the price of CREF stock can be found here: TIAA-CREF - CREF Stock

 

[SecondCor521]

Retire63,

I think you are right for wanting to get to the bottom of this. I have heard that many 401k plans have hefty fees that the companies (such as your employer) pass along to the participants (such as you). I could see them doing this by scraping off some of the dividends before they get reinvested, but I've never personally experienced this and I don't know how it works -- the two 401k plans I've participated in, the employer paid all the fees. You could simply ask the 401k administrator if any of your dividends or earnings are reduced by such fees; they should know the answer.

A quick Google search shows that DODGX distributed $0.52 per share on 12/28/07. Since you likely have over 1,000 shares of DODGX in your 401k ($151,766 / 133.02 current share price), that would mean a distribution on the order of $520. It could be that instead of reinvesting your distribution in additional shares, that the dividend went into a cash account of some kind, and the $4.49 represents your interest on the $520. This would be consistent with the number of shares you own not increasing over 2007.

A less likely possibility is that they simply have not reflected the distribution and/or reinvestment transaction(s) in your account. If it's a big company, I would really doubt this. Usually the transactions show up that day or the day after, and the reinvestment happens on the same day as the dividend.

Ask them to explain it to you until you understand. It's your money.

2Cor521

 

[youbet]

Don't all 401K stock plans work the same by reinvesting income (dividends & capital gains) to purchase additional shares that then earn more dividends/capital gains

No. My observation is that funds owned exclusively by 401k/403b plans frequently add the value of dividends and realized capital gains to the NAV of the current shares. They don't need to characterize these gains separately from unrealized gains for tax purposes like funds in taxable accounts or funds held in both taxable or tax deferred accounts. In the example you gave with DODGX, remember that DODGX is held in both deferred and non-deferred accounts and therefore unrealized cap gains are added to share price and realized cap gains and dividends are distributed, reported for tax purposed for non-deferred accounts, and used to buy additonal shares.

When you compare your funds performance to its benchmark, the S and P 500, do the results look OK for the years of interest? If so, you're good to go.

Edited to add: Do your own research. I'm a retired factory worker and not a CPA. But, this is how I've observed it for many years.

 

[tightasadrum]

LOL,


I called the bank trustee again this morning and was told that their Trust Accounting Department has in fact been working on my question (How are earnings accounted for in our 401K plan?) since 1-4-08 and hoped to have an answer soon. Should it really take a Trust Accounting Department researching for over a week to answer this question. Seems puzzeling to me.

Retire63

I believe this is megacorp-speak for, "Oh hell, how do we cover ourselves so we don't look like a bunch of idiots and open ourselves up to telephone calls or worse problems with hundreds of our employees?"

 

[youbet]

I believe this is megacorp-speak for, "Oh hell, how do we cover ourselves so we don't look like a bunch of idiots and open ourselves up to telephone calls or worse problems with hundreds of our employees?"

Tight..... Are your comments based on anything or are you just jumping on the always popular "bash management" bandwagon? Why do you think the accounting methods being used by OP's 401k are wrong or fraudelent or

 

[tightasadrum]

Tight..... Are your comments based on anything or are you just jumping on the always popular "bash management" bandwagon? Why do you think the accounting methods being used by OP's 401k are wrong or fraudelent or

A little of both I suppose. I've been in the "circle the wagons" meetings. Plus, why on earth would it take the administering bank and the fund Administrator so long to give a simple, straightforward answer? It smell bad to me, even if it is legit.

Believe me, I'm not a mega-corp hater. I (mostly) enjoyed my time in that saddle. But still, how hard could this be?

 

[mickeyd]

Hey Retire63,

Welcome here.

You are asking darn good questions that seem to have the third party administrator in a tizzy. Good job! Most employees never question their 401(k) plan because of the fact that is seems so confusing.

I do not have a clue what the answer is to your question, but my advice is to not let go until the bank or the administrator or someone in charge of the plan can provide you with an explanation that makes complete sense to you. If they try to explain away their response in jargon-loaded phrases, ask them to make it clear to you. It is their job to do so.

It's your retirement plan, not theirs.

 

[FinanceDude]

Hey Retire63,

Welcome here.

You are asking darn good questions that seem to have the third party administrator in a tizzy. Good job! Most employees never question their 401(k) plan because of the fact that is seems so confusing.

I do not have a clue what the answer is to your question, but my advice is to not let go until the bank or the administrator or someone in charge of the plan can provide you with an explanation that makes complete sense to you. If they try to explain away their response in jargon-loaded phrases, ask them to make it clear to you. It is their job to do so.

It's your retirement plan, not theirs.

Good advice.........

 

[youbet]

I'm still uncertain as to exactly what OP's actual question is. Can somebody help?

I think he's saying that his 401k's S&P 500 fund's NAV increased about the same amount as the S&P 500 index but he's surprised that the NAV increase is reflected in higher share prices instead of a combination of higher share prices and more shares.

I'm assuming his full, expected value is there. That is, his fund increased by approximately the same amount as the index, or else he would have mentioned that. The issue is the increase being reflected in increased share price rather than more shares. Right?

I'm asking because if that's the case, I already went down this path with my 401k a number of years ago and the answer, as best I recall, was as stated in my post above.

The real issue OP needs to understand, and he is strangely omitting from his discussion, is whether the total NAV of his holding in this fund increased along with the index by about the same percentage. If so, whether the increase is the result of each existing share having higher NAV or additonal shares being created with dividend and realized cap gains isn't very useful/meaningful.

Again, I'm not a professional in this area, but got that as an explanation a number of years ago.

 

[Retire63]

To everyone:Thanks for all your help.

To all forum members:

Today was my first day as a member of this forum and today I learned several things:

1. There are a lot of very nice helpful people in this forum.
2. 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.
3. My 401K accounts are valued properly on a NAV basis. I was thinking that the plan should be reinvesting earnings and buying more shares just like my IRA's do each year. Based on advice such as gindie's, I checked the change in the year over year share prices in my accounts for the last several years and they match up very close to the benchmark indexes such as the S&P 500 index on a % basis.
4. Several of you should go to work as 401K plan administrators or bank VP 401K trustees. You were able to clearly answer my question regarding what happened to my earnings in a couple of posts today. Last word earlier today from my 401K administrator at my company is that the bank's trust accountants are hoping to have an answer to my earnings question later this week. After 2 weeks of research!! When their answer is completed, several reprentatives from the bank are going to come to our company and along with some senior members of our 401K administrative committee, meet with me to explain how earnings are handled in the plan. Can you believe this!! I think I will call tomorrow and tell the plan administrator to cancel the meeting. I already have my question answered. Thanks again to all. Matter closed.

Retire63

 

[gindie]

I think I will call tomorrow and tell the plan administrator to cancel the meeting. I already have my question answered. Thanks again to all. Matter closed

I wouldn't cancel the meeting. I'd want to hear their reasoning about why it is set up like that.

 

[clifp]

LOL glad the forum could help.

Personally, I wouldn't cancel the meeting. If they went to the trouble of researching I'd enjoy the watching them explain. Then print out this thread and ask is the basically right?

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.

Given that yours operates differently I think making it clear to participants how it works would be valuable.

Personally, I always liked it when my employees didn't take "don't worry about it we are right" for answer when dealing with internal departments as long as they weren't being jerks. Keep them on there toes.

 

[jazz4cash]

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.

 

[youbet]

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?

 

[clifp]

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.

 

[dbr]

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.

 

[dbr]

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