Automatic rebalancing

Automatic rebalancing in a 401(k) plan refers to the process of adjusting retirement savings regularly. This can help ensure an appropriate level of diversification and that a participant’s portfolio allocation remains in line with their risk level.* Some investments grow faster than others, meaning that the asset allocation of a portfolio can change. Automatic rebalancing aims to address this by keeping investments in the right mix and helping ensure your portfolio matches your risk tolerance.

*Rebalancing does not ensure a profit or protect against loss.

Automatic rebalancing and risk management

Automatic rebalancing primarily focuses on maintaining a chosen level of risk. Keeping investments balanced can help possibly increase returns over time. If left unchecked, high-performing investments can dominate a portfolio and increase risk levels.

By nature, automatic rebalancing might lead to selling assets that have performed well and are potentially overpriced while buying more of those that are underperforming and potentially undervalued. For example, a portfolio with automatic rebalancing implemented may sell high-performing assets and buy underperforming ones. 

How often should you rebalance your 401(k)?

The timeframe of rebalancing a 401(k) can vary, but it is typically recommended to review and possibly rebalance your portfolio annually. Some plans offer more frequent options, such as quarterly or bi-annually, depending on the specific rules of the 401(k) plan and the options provided by the employer.

What impact does market volatility have on automatic 401(k) rebalancing?

Changes in the market can impact how often your 401(k) needs to be rebalanced. High volatility might cause your investments to move from your target allocation. This may trigger more frequent rebalancing to help maintain your desired risk level and investment goals. But when the market is more stable, rebalancing might not need to happen as frequently.

Automatic rebalancing can help capitalize on the stock market's cyclical nature. This can help savers stick to their investment strategy and prevent them from making decisions based on market timing or speculative trends. The systematic buying and selling of assets, regardless of market conditions, can help remove the emotional aspect of making investment decisions.

Note: Returns are not guaranteed and depend heavily on overall market conditions and individual asset performance.

Are there fees associated with automatic rebalancing in 401(k) plans?

Yes, there can be fees associated with automatic rebalancing, depending on the 401(k) plan provider and the specific transactions involved. It's important to review the fee structure in your plan documents/disclosures and consult with your investment adviser if applicable.