I worked with two clients this week to help them rebalance their employer plan accounts. Since many of you likely have similar accounts (likely in need of attention), let’s review the process.

Employer plan refresher

Before diving in, let’s clarify what I mean by “employer-sponsored retirement plan.” These are plans employees are offered by their employer (hence the term employer-sponsored) as a way to save for their retirement. They are more commonly known by the tax code provisions that brought them to life – such as 401k, 403b, and 457 plans.

In many cases, the company will pay a portion (or all) of the costs associated with running the plan and in some cases, will lend a hand towards savings by matching employee contributions or making another type of contribution. Employees can seamlessly contribute to these plans via payroll deduction – and when you add in the potential of an employer match, these plans are very popular and prevalent with employees across the US.

Investment Options

Given that these plans are meant to be a benefit to all employees (all of whom will have varying levels of financial knowledge, wealth, risk tolerance, and acumen), the available investment options in the plan are selected by investment consultants and/or plan administrators and are generally somewhat limited in nature (most plans offer 10-20 options, typically in the form of mutual funds). Options will vary by plan/employer. Each plan should provide a full listing of investment options, along with the expense charges and performance of each option – so as always, there is no excuse to not do the homework here!

Meaningful Asset Balances

Given that these plans are the primary way most Americans save for their retirement (plus the added funds from any employer contributions), these accounts often represent a very meaningful amount of people’s investment portfolios – especially as retirement approaches. As a result, it is essential that they be closely monitored and managed in connection with all other investment accounts. Since employees can’t pick where these accounts are custodied (there is one custodian for all Plan accounts), they sometimes get overlooked as they may be at a different firm than other accounts are.

Rebalancing

Now on to the subject of this post – rebalancing. When you first start contributing to an employer plan, you will be asked to make investment elections from the menu of options available within your plan. Some plans will have a default option for employees to choose from as well (usually a target date fund based on your age). However, like most things when it comes to investing, it’s wise to not just “set it and forget it.” Even if your investment option remains appropriate for the duration of your career (which it certainly could), it’s still best practice to review and ensure that is the case. This is where rebalancing comes into play

Rebalancing is the act of reviewing your investments (across all investment accounts – employer plan as well as any other accounts including IRAs and after-tax investments) and determining how much ($ value and %) you have in each of the main asset classed (cash, fixed income, us equity, international equities, commodities, etc). Think of that classic pie chart illustration! These amounts are known as your actual allocations.

Those actual allocations can then be compared against your pre-set targets (based upon your personal fact pattern including age, risk tolerance, return objectives, future plans, etc) – known as your target allocations. If your actual allocations are out of line with your targets, you would want to adjust your actual allocations by making trades, or in the case of your employer plan – rebalancing you fund elections.

In an employer plan, if you want to change your actual allocation, you are essentially swapping your current fund mix for a new one. In most cases, you simply enter the new percentages (by investment option) and the plan handles the trades behind the scenes. Given this process, before you go online to make the changes, it’s important to map out the plan of action and know the ending allocation you are after (both within the plan and your portfolio as a whole). Also note – the plan will give you the choice of adjusting the allocation for your existing balances, your future contributions, or both (the answer to this will of course depend on your situation and objectives).

It can be a bit of a challenge to determine all of these pieces of the puzzle – your actual allocation, your target allocation, and an adjusted allocation mix for your employer plan – so as always, if it’s possible, we suggest working with your own advisor to customize a path forward that is best for you. Happy rebalancing!