Maintaining Your Retirement Portfolio

Setting up your 401(k) or 403(b) is a commendable first step in your retirement saving journey. Perhaps your employer automatically enrolled you into the plan, or perhaps you signed up and selected investments on your own or with the help of a financial professional. Congratulations—but you’re not done yet!

In fact, an important thing to understand about having a workplace retirement account is that it’s not a one-and-done experience. Rather, retirement plans require periodic and ongoing maintenance throughout the course of your career.

That’s for a few reasons. First, as you move through your career, your appetite for risk is likely to evolve. As you get closer to retirement, there is less time for your investments to recover from downswings in the market, so it’s a common strategy to shift the majority of your portfolio to less risky holdings. Second, the market is prone to fluctuations. In any given period of volatility, your balance of assets may shift in a way that no longer aligns with your risk tolerance.

Below are some of the ways you can maintain your retirement portfolio to keep your assets working for you.

Gradually Increase Your Contribution Level to Stay on Track

When you first sign up for your employer’s retirement plan, it’s typical to set your contribution level at just enough to get the full match. Or, if you were auto-enrolled, you may have started at that match percentage or possibly even lower.

While that’s a great start, the reality is that saving 3% or 4%, or even 6%, of your salary may not get you to your goals. Therefore, it may be important to increase your contribution level over time to get to the maximum, or as close as possible. Even increasing your contributions by a percentage point or two each year—such as on your work anniversary, during open enrollment or at bonus time—can go a long way in boosting your retirement savings.

Rebalance at Regular Intervals and After Periods of Market Volatility

The markets are in constant flux and can rise and fall based on world events, business developments and other factors. As a result, the holdings in your retirement account can increase or decrease accordingly, potentially shifting them out of line with your original targets. That’s why it might be a good idea to periodically rebalance, or reset the amount you’ve allocated to various asset classes within your retirement portfolio.

Rebalancing may reduce portfolio volatility, potentially with increased returns. By rebalancing, you are following a fundamental investment principle—you are buying low (those investments that are underperforming) and selling high (those investments that are performing well).
 

You likely set your asset allocation strategy because you believed those were the appropriate percentages of various investments you should own. Thus, you may need to make rebalancing a habit so your portfolio doesn’t become more risky than intended. Since your retirement plan is tax-deferred, there are no tax ramifications to buying and selling within the account.
 

A couple of things to note: some plans offer automatic rebalancing; if yours does, you may want to elect that feature. Secondly, if you are invested in a target-date fund, you will not need to manually rebalance, as this will be done for you automatically.

Address Retirement Accounts from Old Jobs (and, Potentially, Future Jobs)

It’s common these days to switch jobs multiple times throughout your career. And each new job change may mean a retirement account left behind and a new one opened. As the accounts pile up, it can become difficult to get a clear picture of your overall retirement preparedness.

You generally have four options for handling your retirement account when you leave your job.

1. You can leave the funds in your former employer’s plan (if permitted)..
2. You can roll the funds over to your new employer’s qualified plan (if one is available and if rollovers are permitted).
3. You can roll the retirement savings over into an Individual Retirement Account, or IRA.
4. Or, you can cash out the account value and take a lump sum distribution from the current plan (this would be subject to mandatory 20% withholding, as well as potential taxes and a 10% penalty tax).

There are pros and cons to each option, depending on your specific circumstances, financial needs and goals.

Some factors to consider when making a rollover decision include the differences in: investment options, fees and expenses, services, penalty-free withdrawals, creditor protection in bankruptcy and from legal judgments, Required Minimum Distributions or RMDs, the tax treatment of employer stock and the availability of plan loans (i.e., loans are not permitted from IRAs, and the availability from an employer’s qualified retirement plan will depend on the terms of the plan). If you have questions about which option is the best fit for you, you may want to speak with a legal or tax professional.

The Bottom Line

Saving for retirement is a significant undertaking, but it can be much more manageable if you spread the effort out over the span of your career. Part of that effort may include performing some regular account maintenance, gradually increasing your contribution level and periodically rebalancing to ensure your mix of assets remains in line with your risk tolerance and goals. And these small steps can add up—creating a major impact come retirement.