3 Don’t set it and forget it. Be actively involved when it comes to your retirement account. The asset allocation that you set when you first started working and began investing will need to be adjusted. Meaning, you want to diversify your 401(k) by allocating your investments among different asset classes, which include stocks (large-cap, small-cap, growth, international, etc.), bonds, cash, and real estate investment trusts (REITs). Since different asset classes react in different ways to changing market conditions, the right asset allocation mix according to your risk tolerance and retirement time horizon can possibly increase your potential for better returns. For instance, you may have less of your retirement funds allocated to stocks as you get closer to retirement age, as the risk of losing money increases with less time to recoup from losses.
4 Rebalance. There are two general approaches to when you should rebalance your 401(k) account. One is to rebalance on a regular time schedule, such as quarterly, semi-annually, or annually. The other approach is to rebalance when the allocation is a certain number of percentage points away from its target due to the difference in performance between funds in your 401(k) account over time. For example, a 401(k) participant with a 50% stocks, 50% bonds target allocation might rebalance when stocks are more than 55% or less than 45% due to changing market conditions. You need to closely monitor fund balances in your account for this approach, comparing ending balances to the target allocation for each fund. To rebalance means to sell enough of the funds above your target and buy enough of the funds that are below your target.
5 Read your statements. “Not looking at your statement is like throwing money away,â€ says Anderson. “These statements contain a lot of information and plenty of numbers, so it can be all too easy to just look at the bottom-line figure and ignore everything else.â€ Some key things to pay attention to are your expense ratio and fees for each mutual fund in your account. Did you know that just 1% in fees and expenses reduces your account balance at retirement by 28%, eating away at your returns? If you find you are paying more than 1% a year in expense ratios or high fees, you need to get an explanation from your 401(k) manager, and consider possibly moving your money to another fund.