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401(k) Rebalancing and the Role of Lifestyle Funds

Early in the year - time to bargain with yourself - you are going to get in shape, going to mendTonyrobbins3x796612 relationships, maybe even clean the hallway closet.  You are an achiever.. Kinda like Tony Robbins with a little duller teeth...

What's missing from your checklist?  Would you be shocked if I told you that rebalancing your 401k (including any you have sitting at previous companies) should be part of the mix? Often forgotten and usually misunderstood, rebalancing your 401k is a simple process - simply compare your current $$ in each asset category to your target asset allocation.  When any category becomes 5% larger than your target allocation, trim it and spread the proceeds among the other groups to restore the balance. This kind of rebalancing will probably only be needed once every few years, but a sudden rally in any market could skew your allocation in as little as a year.

A recent trend among many companies is to offer Life Cycle or "Target Maturity" funds,  which allow employees to invest in one fund, then automatically shifts the asset allocation over time so that their investments become more conservative as the target date for retirement nears.  This means that employees invested in these funds automatically get rebalancing as the fund manager changes the investment mix to reflect the target retirement date.   Life-cycle funds typically will have the retirement target date in their name, such as Vanguard's Target Retirement 2040 fund.   

Are Target Retirement funds right for your 401k and your employees?  Check out the primer on these funds provided by Pam Yip of the Dallas Morning News.   Target Retirement funds now serve as an appropriate choice for many administrators for use as a default fund, since they provide automatic allocation for the employee who chooses them.  Whether they fit all employee needs is another matter as addressed by the Yip article, since these funds almost always carry a higher expense ratio than a combination of index funds that can provide the same diversification, but have to be actively managed.  In addition, one employee may need a more aggressive investment mix to meet his/her retirement goals than another employee.  As with all things, choice seems to be the way to go to meet the needs of all....


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