Maintaining Your 401(k) Allocation With a Few Easy Steps

David Blaylock, CFP®
24 Jun

Maintaining your 401k allocation, just like any investment account, is important to reach your long-term goals. All investments, including your 401k, have some mix of stocks, bonds, and maybe even cash. You may have paid close attention to your selections the day you signed up for your plan but haven’t reviewed it since. Similar to that pesky oil change light on your car, if you don’t maintain your allocation over time, it could cause problems down the road. Making sure that your account is properly diversified across various asset classes and includes not only large companies but small and international companies is critical to investing success. As time passes one asset class (such as “large-company stocks”) may start to outperform and then your weighting to this sector will be out of sync with your original allocation. Let’s look at an example: 

So how do you make changes to your asset allocation?  Unlike the rebalancing process within your brokerage or investment account where you must enter buy and sell orders for specific holdings, your 401k has a unique process that can be tricky to implement. Below, we will share a few tips to make sure you know how to make the changes accurately.

It is important to understand that when you are updating your plan investments there are likely two changes required.

  1. Existing Balances - Your contributions are going directly into the investment options of your choosing. The first step is to change your existing fund(s) allocation. Look for a section that may say "manage existing investments" and be sure to transfer the balances from your existing investment options to the new investment options.  This is typically done on a percentage basis.

For example, your current 401k balance may be allocated 50% to Fund A, 30% to Fund B and 20% to Fund C.  

Let’s say you want to keep Fund A, but want to remove Fund B and Fund C and replace them with Fund D.

You would put in the following change orders: 

  1. Fund B: 0%
  2. Fund C: 0%
  3. Fund D: 50%
  4. Fund A: no change

What you are doing here is actually “selling” all of your investments in Fund B and Fund C and using the proceeds to purchase Fund D. 

  1. Future Contributions - Next, you will need to change all NEW contributions to be invested consistent with your new allocation.  Look for a button that allows you to change new or future contributions. This will tell your plan to buy a new fund for every contribution moving forward.

In the example above, you changed your existing balances to 50% Fund A, and 50% Fund D.  You will need to make those same percentage choices for all future contributions coming into the account so that your overall allocation remains the same.  In this case, because there is no change to the percentage for Fund A you will make the same overall changes as you did above: 

All new contributions will look as follows: 

  1. Fund B: 0%
  2. Fund C: 0%
  3. Fund D: 50%
  4. Fund A: no change

These updates can take a few days to be reflected in your account, so make sure to check your account frequently until you can verify that the changes that you have made are reflected.  You can typically do this by reviewing "your current investments"  and making sure that the new contributions are coming into your account allocated as you intended.

One other tip: If your 401k plan offers an auto rebalance every year (or every quarter) be sure to sign up for that. I mean, wouldn’t it be nice if your car gave itself an oil change every 5000 miles! If you're in a single balanced fund this isn't required, but if you're in multiple individual funds this allows your 401k provider to automatically rebalance your portfolio to its appropriate allocation.

If all this moving, transferring, allocating and rebalancing is not your cup of tea, many 401k plans offer a simple option. You can select what is known as a target-date fund. This provides the ability to invest your existing balance and future contributions into one investment option. No adjustment or allocation changes required.  Simply select the target fund with the date that most closely matches your estimated retirement date. For example, you may see something like this, “Vanguard Target Date Retirement Fund 2060”. What you are looking for here is that year, “2060”. This tells you that the money in this fund is expecting a retirement date of 2060. 

The farther away from retirement you are, the more risk (and therefore stock) you can take on. As you get closer to retirement you will want to increase your bond allocation to make your portfolio more conservative. These target date funds do exactly that. Therefore if you purchased the “Vanguard Target Date Retirement Fund 2035this fund would be far more conservative than the 2060. Take a look at the allocation mixes below for an example.  

If this sounds easier for you, allocate your existing balance 100% to that target date retirement fund and allocate future contributions the same way and presto, you are on your way to saving for retirement.

Your 401k account and allocation are an important part of your retirement picture.  Make sure that you are giving it the attention that it deserves by regularly reviewing your allocation and investment performance and if you are having trouble, reach out to your Origin Planner or the plan sponsor to get the help that you need.