One Action That May Boost 401(k) Returns in 2021
If you’re looking for a way to boost 401(k) returns in 2021, rebalancing may help you do just that.
Many 401(k) investors fail to rebalance and, in doing so, may potentially miss out on earning more and keeping more of their hard-earned retirement savings.
Because when it comes to saving, it’s not only important what you earn in return.
It’s also important what you keep that may have a big impact on future account value and your ability to reach your retirement savings goals.
This is why rebalancing is so important and may help boost 401(k) returns in 2021. Keep reading to find out what rebalancing is and why it’s important to your retirement future.
What Is Rebalancing?
Rebalancing is the process of realigning the weightings of the assets (your investments) in your portfolio to stay in line with your risk tolerance and your timeline for retirement.
This means you periodically buy or sell assets in your portfolio in order to maintain the initial desired level of asset allocation.
Maintaining an even distribution of assets–such as 50% stocks and 50% bonds–is also a key objective.
If your selected stocks performed well over a period of time, the weighting of stocks may have increased to 60% or 70% and reduced the weighting of the bonds.
In order to return to your initial target 50/50 weighting, you would need to sell some of the stocks and purchase more bonds.
Why Rebalance Your 401(k)?
If you aren’t currently rebalancing your 401(k), you aren’t alone.
Despite it being so important, 80% of 401(k) investors fail to do so.¹
Not regularly rebalancing has the potential to do real harm over time to your retirement account performance.
On the flip side, rebalancing may help you take advantage of opportunities for growth during good markets.
Let’s say you set up and invested money in your 401(k) in 2012, and your original asset allocation target was to have 60% in stocks and 40% in bonds.
And let’s say the stocks performed well over this period of time. If you never rebalanced your account and stocks performed far better than the bonds, you’d have much more money invested in stocks. This may increase your asset allocation to 80% of your portfolio in stocks and only 20% in bonds.
While your account may have posted high returns during this period, you are now at a higher risk level than you originally selected.
And, should the market drop and stocks take a dive, your retirement savings could potentially suffer major losses, and you might lose some (or a lot) of your hard-earned retirement savings.
In this example, to return to your initial 60/40 target weighting, you would need to sell some of your stocks and purchase more bonds.
It’s important to note that rebalancing is not the same thing as reallocation.
Reallocation is when you change the percentage of invested assets in different asset classes to balance risk versus reward.
In other words, reallocation is about how much risk you want to take.
If you want to boost 401(k) returns in 2021, we recommend rebalancing your 401(k) account quarterly, or four times a year. Doing so helps you stay within your risk level and protect against potential losses.
Rebalance and Potentially Boost 401(k) Returns in 2021
Many 401(k) investors believe a set-it-and-forget-it strategy is best when it comes to their retirement savings.
However, as a Morningstar study shows, failing to rebalance is not always in your best interest because the investments you initially chose to help you meet your retirement goals may no longer be the best alternatives for you now.
The study monitored the top 100 best-performing mutual funds between January 1, 1998, and December 31, 2013.
This study revealed that, in any given year of top best-performing 100 mutual funds in any of those years, in the next year, about half of the time, only 8 out of 100 remained in the top 100 the very next year.²
If you stop to think about it – we live in a world where the news cycle runs 24/7 and consumer sentiment can change quickly.
Other studies show that rebalancing your 401(k) every quarter with professional advice may significantly improve your 401(k) performance.
Aon Hewitt and Financial Engines conducted a study from 2006 to 2012 comparing the returns of investors who sought help in the form of online sources or managed accounts to those who managed their 401(k)s themselves.
The study examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers and showed that people who received professional help earned higher median annual returns than those who invested alone.
In fact, “Participants who got Help received, on average, 3.32% (net of fees) more in return annually” than those who managed their own portfolios.³
“If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).”⁴
In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., also reported a 3% average increase in the value of portfolios of clients who work with a good financial advisor.⁵
Check out our 401(k) calculator to see how professional account management (and properly rebalancing) may improve your 401(k) performance.
The Impact of 3% on Your 401(k) Account Performance
Let’s say you have an account balance of $150,000, and you expect 7% returns, and you have 15 years until retirement.
Using our 401(k) calculator, you would see that having professional help to properly rebalance your account may improve your retirement by $212,732.49.
The calculations below do not include employer contributions or future salary deferrals. With those included, you can see that the difference has the potential to be much larger.
Continuing with the example above, imagine what an additional $212,732.49 at retirement might mean for your future.
Would it make the difference between having just enough to get by or being able to enjoy your retirement?
Would it mean not having to work full- or part-time longer than you want to?
Could you travel more? Or spend more time crossing items off your bucket list?
Really think about it. Then ask yourself, Can you afford not to seek professional help to regularly rebalance your 401(k)?
Your Next Step
If you are unsure how to properly rebalance your account or don’t know where to start, we’re here to help.
401(k) Maneuver provides independent, professional account management to help employees, just like you, grow and protect their 401(k) accounts.
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance.
With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are handling the changes for you.
Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.
- “Over 90% of Americans make this 401(k) Mistake.” Mauri Backman, The Motley Fool.
- The Impact of Expert Guidance on Participant Savings and Investment Behaviors. David Blanchett, Morningstar Investment Management Group, 2014.