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While I was studing my 401K I found something strange on my Dividend Mutual Funds. I ask the provider of my 401 for information and this is what they told me.

To clarify, when I invest on thier fund they put the money on a sub-account of the Mutual Fund, so the price is diferent.

On December 13 2006 the unit value for the Example Investment sub-account was 71.555. If you had $100.00 in the fund at the close of business that day, you would own 1.3975263 units.

Meanwhile, the share price of the Example Investment Mutual Fund was 50.61. If you had 100 invested directly with Example Investment, you would own 1.975894 shares of their fund.

Example Investment declared a dividend of 9.88 per share on December 16. This caused the Net Asset Value per share of the fund to drop from 50.61 to 40.73. What does this mean to you as an individual investor? Your balance now falls from 100 to 80.48 and you have a 19.52 distribution (9.88 per share). Most investors opt to receive additional shares to bring their investment back to its original value. In this case 9.88 would buy you an additional 0.479253 shares (19.52/40.73=0.479253). This now brings your account back up to $100.00 and you now own 2.455147 shares in their Example Fund.

My provider reinvests the distribution into new shares of the Example Investment Mutual Fund, retaining the full value of the investment. The number of units and the unit value of the sub-account remain unchanged, while the Net Asset Value per share price of the Example Investment Mutual Fund has declined. Therefore, given that you own 1. 3975263 units in the Example Investment sub-account investing in the Example Investment Mutual Fund, you still have an investment that is worth 100.00 (1.3975263 units multiplied by $71.555 per unit), the same as if you held shares directly in the Example Investment Mutual Fund at 40.73 per share.

So in summary after the dividend

2.455147 * 40.730 = 99.99813731 ~~ 100 sub-account

1.3975263 * 71.555 = 99.9999944 ~~ 100 Mutual Fund

So my question is, does dividend has any impact on a 401K?

migrated from quant.stackexchange.com Nov 7 '13 at 19:24

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Adjusting for a market change from day to day, the dividend should have no impact on you. Your X shares time $Y should be nearly identical right after that dividend hits the account.

And within the 401(k) or IRA for that matter, the accounting doesn't matter most of the time. Outside a retirement account, you need to pay tax on the dividend, and add the newly purchased shares' cost to your cost basis.

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It appears from your description that the 401k account has the automatic dividend reinvestment policy, and that the end result is exactly the same as the external account with the same policy. I.e.: no difference, the dividend affected the 401k account in exactly the same way it affected the external account. The only thing is that for external account you can take the dividend distribution, while for 401k you cannot - it is reinvested automatically.

Were you expecting something else?

  • Yes, since I'm following a similar approach with individual stock. I have notice the stock price drop after a dividend, but it recovers with a few days if not the same day. So the price drop is almost none existence. So in my case with personal stocks, it will be something like this If I had $100 invested on a stock with price $50.61, I will have 1.975894 shares. If a dividend of $9.88 per share was declare, after the dividend I will on the account 100 + ($9.88 * 1.975894) = $119.52. Better on, when I reinvest the dividend, assuming the stock price doesn't change, I will have 2.3615 units. – roncansan Nov 7 '13 at 20:24
  • @roncansan but the price would also go up for the 401k account just as well. I still don't follow what difference are you seeing here... – littleadv Nov 7 '13 at 20:36

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