You probably haven't rebalanced your 401(k). Here's why you should.

Many workers don’t realize they should be regularly rebalancing their retirement plans. Allocations may become unbalanced overtime, which makes monitoring and rebalancing your 401(k) regularly essential.

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

CERTIFIED FINANCIAL PLANNER™ & former Managing Editor, Growth

Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™ and former managing editor for growth at Policygenius. She helped produce the Easy Money newsletter. She passed her exam to become a CERTIFIED FINANCIAL PLANNER™ in November 2020.

Hanna's work has appeared in NBC News, Business Insider and Inc. Magazine. She is regularly quoted in top media outlets, including CNBC, Best Company and HerMoney. She has also appeared on the Money Moolala podcast and All's Fair podcast.

Prior to Policygenius, Hanna wrote for KNBC in Los Angeles and WNBC in New York. When she isn't writing, she's (often) running, (usually) cooking and (sometimes) doing photography.

Published April 19, 2021|3 min read

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If you’re like most Americans, you probably haven’t bought or sold (or even checked) any of the investments in your 401(k). Half of people don’t know how their retirement money is invested, according to a survey by Schroders Retirement Survey. If so, you may be missing out on better returns.

Many workers don’t realize they should be regularly rebalancing their retirement plans. Rebalancing involves adjusting your portfolio so that the percentage of stocks and bonds remain consistent. Retirement fund allocations may become unbalanced overtime, which makes monitoring and rebalancing your 401(k) regularly essential.

“Folks don’t rebalance their 401(k)s since they are either too busy with their everyday lives and just don’t understand how important it is,” said Thomas Balcom, certified financial planner at 1650 Wealth Management. “They either default to the best performer or the investment which offers the lowest risk instead of creating a diversified portfolio.” 

Thinking about how your 401(k) money is invested may not be top of mind. But not knowing can pose major problems in the long run. For example, if you’re close to retirement age and your fund is too heavily weighted towards stocks, you may be more exposed to market losses. Or, if you’re decades away from retirement and your portfolio is too heavily weighted in bonds or fixed-income investments, you may be missing out on higher returns. Either way, you may reach retirement age with less money than you thought. 

How 401(k)s are typically structured

Many 401(k)s put your money into a target-date fund, which rebalances your portfolio over time based on a date in the future, typically around your expected retirement age. The portfolio will shift from mostly stocks to more conservative investments as you approach your target date. Designed to be “set it and forget it,” these funds can make it difficult to understand what exactly your 401(k) is invested in at any given time. 

But some workers go it alone. Some simply don’t realize their money is invested, or others manage their own allocation to potentially get higher returns. Actively managing your retirement portfolio in an effort to “beat the market” can yield negative results, said Mark Wilson, certified financial planner at Mile Wealth. 

“I review my clients’ 401(k)s to make sure their asset allocation meets their risk tolerance and risk capacity. I often find two things: A mix of five to seven funds that are the best performing over the last three years, or a mess of funds that haven't been reviewed since the account inception,” he said. “They are watching the fund performance periodically and probably hurting performance by ‘performance chasing.’”

Understanding that you need to check your 401(k) investments is one thing. Actually knowing how to allocate your retirement portfolio is another. Two-thirds of Americans say they don’t know how to choose investments in their 401(k)s that can reach their retirement goals, according to a survey by Fisher Investments. 

How to rebalance your portfolio

If it’s your first time rebalancing your account or you’re revisiting your allocation, here’s how  to rebuild your portfolio. 

  1. Determine your current allocation. Take a look at your entire portfolio (including your 401(k) and other accounts, like an individual retirement account) and how it's currently split up among stocks and bonds. If you have multiple accounts, consider consolidating them under one financial institution, if possible. This will make it easier to track your allocation in one place. 

  2. Identify your risk tolerance and time horizon. Some investors are willing to take on more risk for more potential return so they weigh their retirement savings more heavily in stocks. Consider how close you are to retirement age. 

  3. Adjust your portfolio. Rebalancing involves selling off investments that are weighted too heavily and buying more investments that aren’t weighted enough. For example, if you currently have a portfolio that’s 70% stocks and 30% bonds and you want to make it more conservative, you could sell stocks and buy bonds until you achieve a better ratio. 

If you want to take a hands-off approach, consider leaving your money in a target-date fund, and periodically check to make sure your money is well diversified based on your risk tolerance and time horizon. Keep in mind this does come at a cost, as target date funds typically have higher fees associated with them. While most target date funds are well built and automatically shift around your money, even robots are prone to slip ups, said Balcom. He suggests checking at least annually. 

Wilson also recommends consulting a financial adviser before rebalancing your portfolio. They can help you make sense of your specific financial situation and give you professional advice. 

Image: Nastia Kobzarenko