Money & Policy

Is Your 401(k) Out of Balance?

Fidelity finds that 1 in 10 boomers have all their 401(k) in stocks

(This article previously appeared on MarketWatch.com.)

Got stocks? For some 401(k) investors, the answer to that question is an emphatic “yes.”

Ten percent of 55- to 59-year-olds and 11 percent of 50- to 54-year-olds had all of their 401(k) savings invested in stocks, according to a new Fidelity Investments study, based on data from June on 21,200 defined-contribution plans, covering 13.5 million plan participants.

Another 27 percent of people aged 55 to 59, and 18 percent of people aged 50 to 54 were invested in stock mutual funds at a rate that was at least 10 percentage points higher than recommended — and the recommended stock allocation isn’t exactly for the weak-kneed.

Some 401(k) savers are simply taking a dangerous risk by failing to diversify their retirement savings.

For example, Fidelity recommends that a 50-year-old saver invest in the company’s Freedom Fund 2030, which has a total equity allocation of 84 percent. (For the study, Fidelity assumed a retirement age of 67.)

The study is limited in that it focuses solely on Fidelity accounts. These savers might have money invested elsewhere, and they might own fixed-income and other less-risky investments in those other accounts. Or, these savers might expect to receive some form of guaranteed income in retirement, such as a pension, which would allow them to take more risks with their 401(k) money.

But there’s a decent chance that at least some of these 401(k) savers are simply taking a dangerous risk by failing to diversify their retirement savings. Maybe they’ve forgotten that from October 2007 through March 2009, the S&P 500 lost almost 49 percent.

Of course, the market’s been on a tear since then. In the past five years, average 401(k) account balances have increased 50 percent, partly due to stock-market gains, according to the Fidelity data.

Most 401(k) Savers Don’t Rebalance

While it’s easy to forget about managing your portfolio when everything’s coming up roses, it’s nevertheless crucial to make sure you’re not taking on more risk than you can handle, as the market’s gain pushes a higher percentage of your money into stocks.

Rebalancing your portfolio back to the mix of stocks and bonds that you’ve decided is best for you is crucial to protect you from big unexpected market swings.

If you haven’t rebalanced recently, you’re not alone. Just 19 percent of 401(k) savers rebalanced in 2014 (that figure excludes savers who are invested in target-date funds, because the mutual fund does the rebalancing for them), according to a study by Aon Hewitt of 138 plans covering 3.5 million participants.

Depending on your 401(k) plan provider, it might be easy to rebalance through your online platform. “Most of the 401(k) platforms we work with, it’s at most one, two, three clicks to rebalance,” says Karl W. Kunkle, a partner, retirement plan solutions, with Schneider Downs Wealth Management Advisors in Pittsburgh, Pa. He consults with employers on their 401(k) plans.

Many 401(k) platforms allow investors to easily reallocate new contributions, or to redirect their entire balance. “You can rebalance back to your original allocation. You can set different allocations for new money or old money,” Kunkle says. “There’s great sophistication in the platforms these days.”

But rebalancing may be the easy part. Before rebalancing, investors first need to take a step back and consider their asset allocation, he says.

What percentage of your money should be in which types of investments? “People should look at it at least annually. Is their allocation continuing to match their particular risk tolerance?” Kunkle says. That’s not a question you want to be asking during a market downturn, he adds.

Often, the problem is apathy. “I see a lot of people setting an initial allocation and not ever changing it,” Kunkle says. If that describes you, consider taking a look at your plan’s target-date fund, which handles asset allocation and rebalancing for you. Or, for tips on asset allocation for long-term investors, read this story on WSJ.com: Make More Money and Worry Less.

How Much Money Where?

Wondering how to allocate your money between stocks and bonds, and the various subcategories of each? “A key component to asset allocation is the time frame for when you need to use the money,” says Maura Griffin, founder of Blue Spark Capital Advisors in New York, N.Y..

“If savers are 65 and about to retire, and all their retirement and non-retirement savings is 100 percent in equities, that would be very foolish. They have put their early retirement spending money at risk,” Griffin says.

“However, if the savers are in their 20s, 30s and in some cases older, it could be a smart move to have all their 401(k) money in equities, assuming their accounts are broadly diversified among equities, international and U.S., large- and small-cap,” she says.

“I always suggest keeping five years’ worth of spending in safe assets, so my clients can sleep at night and not worry about the vagaries of the stock market,” Griffin says. “Then they can keep the rest in different parts of the equity market, while continually funding the safer near-term pocket of their portfolio.”

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