What’s in your 401(k)?

If you work for a company that offers a 401(k) program, you very likely have had to decide on how your contributions are to be invested. In addition to deciding how to diversify your contributions, you have had to decide how much of your pre-tax dollars to contribute to the program.

Hopefully, you have spent some amount of time looking at the different options and have come up with a distribution that reflects your savings goals, retirement horizon and risk tolerance. Additionally, because of the current economic conditions you should be reviewing your 401(k) performance and rebalancing the contributions to realign with your original targets. You do look at your 401(k) performance don’t you?

If you haven’t been monitoring your 401(k) don’t feel too bad, you aren’t alone. Many people feel that the one thing they don’t have to worry about is their 401(k) because there isn’t anything they can do about it. Nothing could be further from the truth.

Why should I rebalance my 401(k)?

• closing in on retirement – As you get closer to retirement you probably want to get off of the roller coaster ride that a heavy stock portfolio provides and move into something more conservative. I am not saying that you should move everything to a CD or money market earning 0.5%, but you may want to move part of your stock allocation into something a little more stable.
• asset allocation out of balance - The primary objective of rebalancing is risk control. If your asset allocation gets too heavy in one area, even due to excellent performance, the amount of risk you are taking also increases. Depending on your tolerance, you may not want to accept the additional risk.
• poor performance – The hardest thing for some people is to let go of the junk in their portfolio. Maybe there is some sentimental attachment or a ‘gut feeling’ that the performance will eventually improve. This is where the help of an objective outside influence could pay real dividends.

Ultimately, the decision is up to you. You are the only person that knows how much risk you are willing to take. You are the only person that knows when you are ready to call it a career. Don’t ignore the responsibility of preparing for your retirement until it is too late.