What Rate of Return Should I Expect on My 401(k)?

Your 401(k) plan’s rate of return is directly correlated to the investment portfolio you create with your contributions and the current market environment. Each 401(k) plan is different but the contributions accumulated within your plan are generally diversified among stock, bond, and cash investments.

They can provide an average annual return that usually ranges from 5% to 8%. The return can depend on how you allocate your funds to each investment option. The five-year average was a comfortable 9.7% in 2024.

How 401(k) Plans Work

An employer-sponsored retirement plan such as a 401(k) can be a valuable tool in accumulating savings for the long term. Each company that offers a 401(k) plan provides an opportunity for employees to contribute a percentage of their employee’s wages on a pretax basis through paycheck deferrals or on an after-tax basis for Roth 401(k)s. Employers often match employee contributions up to a certain percentage, creating an even greater incentive to save.

They vary according to the company and the plan provider but each 401(k) offers several investment options to which individuals can allocate their contributions. They usually include mutual funds and exchange-traded funds (ETFs). Employees benefit from systematic savings and reinvestment and their investments’ tax-free growth and employer-matching contributions. They also gain from the economies-of-scale nature of 401(k) plans and the variety of investment options.

It’s All About Asset Allocation

How your 401(k) account performs depends entirely on your asset allocation: the type of funds you invest in, the combination of funds, and how much money you’ve allocated to each.

Investors experience different results depending on the investment options and allocations available within their specific plans and how they take advantage of them. Two employees at the same company could participate in the same 401(k) plan but experience different rates of return based on the type of investments they select.

Different assets perform differently and meet different needs. Debt instruments like bonds and certificates of deposit (CDs) provide generally safe income but not much growth and not as much of a return. Real estate that’s available to investors in a real estate investment trust (REIT) or a real estate mutual fund or ETF offers income and often capital appreciation as well. Corporate stock like equities has the highest potential return.

The equities universe is a huge one, however, and returns vary tremendously. Some stocks offer good income through their rich dividends but little appreciation. Blue-chip and large-cap stocks of well-established, major corporations offer steady returns but on the lower side. Smaller, fast-moving firms are often pegged as “growth stocks.” They have the potential to offer a high rate of return as the name implies.

The greater a stock’s potential for aggressive growth, the greater its chances of big tumbles become, too, however. This is referred to as the risk-return tradeoff.

Your asset allocation should be determined based on your specific appetite for risk, also known as your risk tolerance, and the time you have until you must begin taking withdrawals from your retirement account.

Investors with a low appetite for risk are usually better served by placing investments in less volatile allocations that could result in lower rates of return over time. Investors with a greater risk tolerance are more likely to choose investments with more potential for higher returns but with greater volatility.

Balancing Risk and Returns

That 5% to 8% range is an average rate of return based on the common moderately aggressive allocation among investors participating in 401(k) plans: 60% equities and 40% debt/cash. A 60/40 portfolio allocation is designed to achieve long-term growth through stock holdings while mitigating volatility with bond and cash positions.

The 60/40 portfolio is in the middle. You might expect higher, double-digit returns over time if you invest in a more aggressive portfolio of perhaps 70% equities, 25% debt/fixed-income instruments, and only 5% cash. The volatility within your account may also be much greater, however.

Your portfolio would have a pretty smooth ride if you chose one that was more conservative, perhaps 15% equities, 75% debt/fixed-income instruments, and 10% cash but offering returns of only 2% to 3% depending on the prevailing interest rates.

An individual with a long time horizon typically takes on more risk within a portfolio than one who is near retirement. It’s commonly prudent for investors to gradually shift the assets within their portfolios as they get closer to retirement.

Target-date funds have become a popular choice among 401(k) plan participants as a one-stop-shopping way to accomplish this. These mutual funds allow investors to select a date near their projected retirement year such as 2028 or 2050.

Funds with more distant target dates focus on investment allocations more aggressively than funds with a near-term date. Rates of return on target-date funds vary from company to company but these one-fund allocations offer a hands-off approach to asset allocation within a 401(k).

How Is Your 401(k) Doing?

You can’t ever be 100% certain of the returns your 401(k) will generate. That’s what separates investing from generic saving. You can and should make comparisons, however, if you want a sense of how your portfolio is performing.

You can compare the investments in your account to other mutual funds or ETFs that invest in similar assets or have similar objectives such as aggressive growth, balanced income, or appreciation. You can also see how a fund is doing compared to an index of its asset class, sector, or security type.

You might want to see whether it’s underperforming or outperforming the Dow Jones U.S. Real Estate Index (DJUSRE) which tracks REITs and real estate companies if you own a real estate fund. You can even compare them to the stock market itself if you own broad-based equity funds.

Don’t be surprised if your return lags the index by 1% to 2%, however. This is caused by the fees charged by both your individual funds and by the 401(k) plan itself. This sort of expense is pretty much beyond your control and is to be expected.

The Bottom Line

It isn’t possible to predict your rate of return within your 401(k) but you can use the basics of asset allocation and risk tolerance in conjunction with your time horizon to create a portfolio to help you reach your retirement goals. Look carefully at the fees different choices entail.

Each of these factors influences the overall rate of return within your 401(k) account and should be reviewed regularly to ensure that your account meets your investment preferences and nest-egg accumulation needs.

Your 401(k)’s rate of return isn’t outside your control. You pinpoint what you’ll need in retirement plus the time frame until you retire and then determine what you expect from your 401(k) from there.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.