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401k Skips Dividends and Capital Gains

This is sort of a tangent from the other thread about dividends and expense ratios. My wife's 401k (through New England Financial [NEF]) doesn't pay dividends or capital gains. Is this a standard practice? I went to their web page and got the following explaination:

Where are my dividends and capital gains?

Dividends and capital gains are automatically reinvested in additional shares of mutual funds or, in the case of annuity options, the underlying funds. These distributions cause the net asset values of the mutual fund or the underlying fund to decline. However, since distributions purchase additional shares, unit values are maintained at their previous levels.

To me, this is a pretty bogus explaination. As others have pointed out, if you go over to Yahoo and chart a fund's close and "adjusted close" (adjusted for dividends and splits) over time, it's easy to see that the adjusted close has a higher return than the unadjusted close;

So what gives? Is NEF stiffing us out of our dividends? This is, of course, on top of the $6.25 per quarter "contract fee". Even if their explaination is valid, I would feel much better about receiving those dividends and purchasing additional shares. At least then, I wouldn't have this nagging feeling that they're cheating us.

To do a rudimentary comparison, I pulled up the fund performance sheet for my wife's 401k. For the 3-year period ending 3/30/07, their S&P

500 index fund had a return of 8.85%. So I went over to Yahoo and pulled up the following data:

Date Close Adj. Close

3/30/07 130.83 130.83 3/30/04 104.08 98.60

Assuming 4 compounding periods per year, this corresponds to a return of 7.7% and 9.55%, respectively.

I'm going to go out on a limb and guess that NEF's S&P 500 index fund did NOT beat VFINX by 1.15%. Instead, it looks like they're lumping the dividends in with the NAV, but then taking a pretty big slice. The 0.7% difference can be explained by the higher expense ratio (0.6% vs. 0.18%) and different compounding.

Anyway, that's my $0.02 worth.

--Bill

Reply to
Bill Woessner
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Notice in this response the phrase, "unit values". Your wife's 401k doesn't have shares of the mutual fund, she has units of a sort of umbrella fund. The values of these units include the re-invested dividends and capital gains. She isn't being stiffed at all, and yes, this is a common practice.

Elizabeth Richardson

Reply to
Elizabeth Richardson

In what sense, then, is it not paying dividends or capital gains? The claim is that it is reinvesting them, which seems pretty standard to me.

Well sure -- the adjusted close is what you'd get if you reinvest dividends--which is what you're doing.

Indeed. So they're reinvesting the dividends for you. Doesn't seem like there's anything wrong there--although 0.6% expense ratio for an S&P 500 fund seems out of line.

Reply to
Andrew Koenig

The adjusted close number is calculated by Yahoo. Yahoo calculates it by assuming the value today is 100% and stepping back through time and continually reducing past share prices before distributions. For the obvious reason of not being able to change history, fund companies cannot report this way -- instead they must reduce share prices after distributions and give you more shares.

This is also the reason why people constantly make mistakes when doing analysis of past data. Time and time again, I see people write something like "DOW in 1980 was X, DOW now is Y, return is Y/X-1". NO!!! Stock indexes show the blended share price of the underlying stocks. Hence dividends will reduce the total stock index number. Where did it go? Up into thin air -- it simply is not tracked by at the stock exchange price level.

Reply to
wyu

When I take your numbers, I get 7.92% and 9.89% a bit higher than you show. S&P during that time was up 8.03% (all are annualized numbers) so the difference from 8.03 to 7.92 makes sense, I'd think. But you are right, adding in the dividends and 9.55% looks right. If your expense ratio is .60, that's just .42 so you should be seeing 9.1% or greater total return. .35% is quite a bit to just fall through the cracks. Their original explanation didn't bother me, but numbers speak for themselves, there should be a web site where you can download past few years annual total returns. I'd suggest you do that. JOE

Reply to
joetaxpayer

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