Here’s the Average 401(k) Rate of Return (Plus Expenses)

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Choosing to take advantage of an employer-sponsored retirement plan like a 401(k) is a positive step towards future financial independence. While almost any planning for retirement is wise, you need to make sure you’ve done your due diligence and homework before making an investment. It’s important you understand the potential average 401(k) return and any possible expenses associated with this financial tool. Fully understanding these aspects protects you from having unrealistic expectations that might leave you and your family unprepared for retirement.


What is the average 401(k) return?

Before we answer this question, it’s important to understand that not all 401(k)s are created equally. As 401(ks) consist of different blends of stocks, bonds and other investment mediums, the potential return range will differ. Additionally, 401(k) managers can choose to accept different levels of risk, which will skew the potential average returns. On top of that, all financial investment tools are subject to the effects of the market, world events and the overall health of the invested economies. Therefore, the average rate of return is going to depend on a lot of factors.

That said, the average 401(k) return across the industry has historically been around 5% to 8% annually. Riskier investment portfolios will be at the top of this range and potentially higher, while less risky investment selections will be at the bottom of the range or potentially lower. Return rates are also understandably higher in flourishing economies and lower during times of economic hardship. Typically, those further from retirement can accept more risk to grow their portfolio, which comes with a higher potential rate of return, and those closer to retirement age will need to lower their accepted risk as the effects of losses could be more impactful.

401(k) returns and expenses

One of the best ways to get a good grasp on average 401(k) returns is to look at historical averages of some of the largest and most popular funds available. Many investors utilize these highlighted funds for their retirement account investments. Keep in mind that these rates of return are impacted by the success or drops of the market. Over the past five years shown in the table, the market as a whole has been strong, which is why the yearly averages are higher than the aforementioned average rates.

Fund TickerSymbolType of FundAverage 5-Year ReturnExpense Ratio
Vanguard Institutional Index IVINIXLarge Blended11.44%0.035%
American Funds Europacific Growth AAEPGXForeign Large Growth4.35%0.830%
Fidelity 500 IndexFXAIXLarge Blended11.46%0.015%
Fidelity ContrafundFCNTXLarge Growth12.33%0.820%
Vanguard Total Bond Market Index AdmVBTLXIntermediate Core Bond2.24%0.050%
Vanguard 500 Index AdmiralVFIAXLarge Blend11.44%0.040%
Vanguard Primecap InvVPMCXLarge Growth13.88%0.380%
Vanguard Mid CapIndex AdmiralVIMAXMid-cap Blend9.43%0.050%
Vanguard Wellington InvVWELX50%-70% Equity7.79%0.250%
Dodge & Cox StockDODGXLarge Value10.05%0.520%

How to optimize your 401(k) contributions

The key to optimizing your 401(k) contributions and getting the most benefit starts with understanding how these tools work. Specifically, there are three things investors can do to get the most out of their retirement account.

First, understand and take advantage of the tax implications of 401(k)s. Investors can earn tax breaks now or defer them to later in life by utilizing 401(k) retirement accounts. As every investor’s situation is different, it’s critical you make sure you’re using the right type of 401(k). Second, take advantage of any employer fund matching programs available. Many employers will match a certain percentage of your annual contribution to your retirement account. If you’re not taking advantage of this free money, you’re doing yourself a disservice.

Lastly, contribute early and often. Saving for retirement is not a sprint; it should be treated as a steady marathon with affordable and consistent contributions. There are yearly caps on how much you can invest, which you should be aware of. It’s never too late to start saving for retirement, but the earlier you start the better.

Borrowing from 401(k)

401(k)s are designed to be a retirement tool, which means waiting until retirement to access your funds is a necessary step to reap all the benefits. That being said, life happens from time to time. You may need access to your funds before your retirement date. If this is the case, you will have two options.

First, you can take out a 401(k) loan up to $50,000 or 50% of your account balance, whichever is less. Keep in mind these loans will need to be paid back based on the agreed-upon terms or you will find yourself subject to an early withdrawal penalty. Your second option to access your 401(k) funds early is a hardship withdrawal. A qualifying need like unexpected medical bills, funeral expenses or purchasing a home for your family to live in will allow you to access your funds immediately. But do be aware you will incur a 10% early withdrawal penalty which will have a profound effect on your average 401(k) return. Utilize these options as a last resort.

The final word

A firm grasp on average 401(k) returns empowers you to make more informed decisions as you plan for retirement. When deciding which option to choose, don’t just look for the highest rate of return. Make sure you assess your current situation and how much risk you can comfortably accept as well as the associated management fees with professionally managed funds. You have extensive options when it comes to how you invest, what you invest in, and who controls your retirement accounts.

Jason Lee

Personal Finance Contributor

Jason Lee is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.