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Revealing Details of a 401(k) Plan

Contributed by mm | November 5, 2007 4:56 AM PST

Every year, each 401(k) Plan Administrator is required by law to disclose summary financial information of 401(k) plan to plan participants. I was reading the Microsoft 2006 Summary Annual Report today and some numbers are quite revealing.

Here is the original text from the report:

"Benefits under the plan are provided by Fidelity Management Trust Company. Plan expenses were $174,588,997. These expenses included $0 in administrative expenses and $174,588,997 in benefits paid to participants and beneficiaries, and $0 in other expenses. A total of 58,263 persons were participants in or beneficiaries of the plan at the end of the plan year, although not all of these persons had yet earned the right to receive benefits.


The value of plan assets, after subtracting liabilities of the plan, was $4,430,511,055 as of December 31, 2006, compared to $3,522,951,171 as of January 1, 2006. During the plan year the plan experienced an increase in its net assets of $907,557,884. The increase includes unrealized appreciation of depreciation in the value of plan assets; that is, the difference between the value of the plan's assets at the end of the year and the value of the assets at the beginning of the year or the cost of assets acquired during the year. The plan has a total income of $1,071,286,136 including employer contributions of $128,814,606, participant contributions of $428,090,550, realized gains of $0 from the sale of assets, earnings from investments of $213,077,272, and unrealized appreciation of $301,303,708."

If the above numbers are boring, below are some interesting revelations from quick calculation:

1) The average account balance by the end of the year is $4.43B / 58,263 = $76,043, which is much smaller than the nation's average 401(k) account balance of $102,014 from a published 2006 study. This probably reflects the relative young age and short tenure of Microsoft employees.

2) Given that Microsoft approximately have 48,000 domestic employees (source: Microsoft 2007 Annual Report), the average employee contribution per employee in 2006 is $428M / 48,000 = ~$8,900, compared to the 2006 401(k) contribution limit of $15,000 (plus catch-up limit of $5,000 for employee over 50 years old).

3) The average employer contribution per employee is $129M / 48,000 = $2,684. Microsoft's 401(k) plan provides company match of 50 cents per one dollar contribution, up to the 6% of employee's annual base salary. If fully matched, $2,684 suggests an average base salary of approximately $90,000. My gut feeling is $90k is in the close neighborhood of Microsoft's average base salary, so it appears that an average Microsoftie is saving enough to get the full company match. (A less likely but still possible alternative conclusion is high income employees contributed disproportionately to the plan and lifted the average figure.)

4) Average portfolio return of the year is approximately (213M + $301M) / (($3.52B + $4.43B) / 2) = 12.9%. Not too bad on an absolute sense but certainly not stellar compared to the S&P 500 return of over 15% in 2006 and my 401(k) portfolio's annual return of 18.7% in the same year. But it can also be that my portfolio is too aggressive though.

Can you draw additional conclusion from the report? Please share in the comments.

This Post Has Received 8 Comments. Share Your Opinions Too.


Madame X Commented on November 5, 2007

Does is really say the administrative expenses are ZERO? That doesn't seem possible.


Juan22 Commented on November 5, 2007

Those are some big numbers to deal with. I would love to have that avg. account balance.


Creative Investor Commented on November 5, 2007

I agree with Madame X that it's really strange that there are no actual expenses related to administration of the plan. I had not realized that Fidelity started doing charity work... for Microsoft?


MM Commented on November 5, 2007

Yes, that zero administrative expense deal is quite special. Fidelity also provides trading account for Microsoft's ESPP shares, and give all employees the best commission tier. Guess Fidelity will gain by upselling employees with more features. Myself as an example: Fidelity is my regular trading account and I also opened my Roth IRA and SE 401(k) with Fidelity. Although my 401(k) balance is only $120k, I have about $600k assets with Fidelity (the rest is mostly with Ameritrade).


Nabloid Commented on November 5, 2007

I assure you, it is no charity. Fidelity didn't become a big business by managing billions in assets for free.


jack Commented on November 6, 2007

The 401k plan had 5 fidelity funds (now 4 after yanking fidelity overseas recently). I'm guessing they make money when participants choose their funds.


shadox Commented on November 10, 2007

Many plans have 0 administrative costs. That does not mean that administrative costs are actually zero, only that the plan was not charged for these costs.

My company's 401K for example, has $8M in assets, but our 401K provider does not charge us any administrative fees. They make their money from the expense ratios of the various funds. Each fund company pays the administrator a certain percentage of holdings - all are required to pay the same amount to make sure that the management company has no financial incentive to promote one fund over another.


freespeedme Commented on July 2, 2008

frog ugly you go watch trust ugly head head we


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