To rebalance your 401(k), compare its current investment mix with a target allocation that still fits your goals, time horizon, and tolerance for risk. Then use the controls your plan offers to direct future contributions, buy underweighted investments, sell overweighted ones, or combine those approaches. Rebalancing restores a chosen mix; it is not a way to predict which investment will perform best.
What rebalancing does
Investments can grow at different rates, causing your account to drift from its intended allocation. Rebalancing brings the mix back toward the target you chose. As the SEC’s definition of rebalancing puts it, “Rebalancing brings a portfolio back to its original asset allocation mix.”
The target itself is a personal decision based on your goals, time horizon, and risk tolerance. There is no single stock-and-bond split that suits every 401(k) participant. If your circumstances or comfort with risk have changed, reconsider whether the target remains appropriate before restoring it.
How to rebalance your 401(k), step by step
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Find your target allocation
Use the mix you have chosen for your goals and risk tolerance. If you have not set a target, decide on one before making trades; recent performance alone is not a reason to change it.
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Check your current allocation
Review your plan account online or your latest statement. Compare the account’s allocation across relevant investment categories with your target. Your plan’s investment menu and controls determine which choices are available; the IRS explains the participant-directed plan context in its retirement plan investments FAQs.
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Choose how to move toward the target
Plans differ, so check which of these methods your plan permits:
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- Redirect future contributions: Change where new contributions go so more is directed to underweighted categories. This changes future deposits without requiring a sale of current holdings.
- Buy underweighted investments: If your plan allows it, direct available cash or new contributions toward investments that are below target.
- Sell and reallocate: Reduce overweighted holdings and move the proceeds into underweighted investments. Check for plan restrictions or transaction charges before placing trades.
You can combine methods—for example, redirect contributions and make a one-time adjustment to current holdings. The SEC and FINRA describe these approaches generally; they do not establish that every employer plan offers each one. See FINRA’s asset allocation and diversification guidance and the SEC’s beginner’s guide to asset allocation, diversification, and rebalancing.
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Review the account as a whole
Compare your total holdings with your target, not just one fund at a time. A target-date fund adjusts its allocation internally over time. Holding other investments alongside one can change your account’s overall mix, so account for those holdings when checking allocation. Review the fund and plan documents to understand the fund’s design and the choices available to you.
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Read plan terms before confirming
Check the plan’s transaction instructions, investment descriptions, and fee disclosures. Fees, restrictions, and processing rules vary by plan and investment. SEC guidance advises investors to consider transaction fees and tax consequences; do not assume a transaction is free or draw an individual tax conclusion without checking the relevant plan documents and your circumstances.
How often should you rebalance?
There is no official schedule. A calendar review—such as every six or twelve months—or a review when an allocation moves beyond a threshold you selected in advance are both possible approaches. SEC materials give six- and twelve-month intervals as examples, not requirements; FINRA says there is no official timeline and suggests considering an annual review. Choose a process you can follow, and avoid treating frequent changes as a way to forecast returns.
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What to check before making the change
- Whether your target still fits: A changed time horizon, goal, or tolerance for risk may call for reconsidering the target rather than automatically restoring an old one.
- Which controls your plan provides: Employer plans set their own investment menus and transaction options. The SEC’s 401(k) plan overview describes the account context, but your plan documents govern your actual choices.
- Potential charges or restrictions: FINRA notes that account shifts may involve sales charges or other fees. Check your plan disclosures for terms that apply to the specific transaction.
- Tax context: Taxable-account rules should not automatically be applied to a 401(k). The general investor guidance cited here does not determine the tax result for an individual transaction.
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