The robust stock market returns of the last two years are posing a new challenge for plan sponsors and their advisers: How can they encourage participants to rebalance their portfolios without promoting frequent trading?

“Some plan sponsors struggle with this a little bit because they’re still coming from the history where you didn’t necessarily want people trading too much because you didn’t want be to be reacting to the market,” according to Rob Austin, head of thought leadership with Alight Solutions, based in Charlotte, North Carolina.

But when Austin examines actual participant behavior and sees data showing just 20% of individuals make a trade in any particular year, it is concerning that many participants may be foregoing rebalancing at all, he says, adding, “It really should be higher.”

Map Out a Communication Strategy

With that in mind, plan sponsors and their advisers are considering how best to convey the benefits of rebalancing. They are weighing different methods of communicating, as well as underscoring automatic features that will manage the task for participants, including target-date funds.

Megan Yost, a Boston-based senior vice president and engagement strategist at Segal Benz, recommends that plan sponsors keep the big picture in mind when highlighting the benefits to employees of rebalancing their retirement portfolios.

“Take a step back and just remember that managing retirement savings is really overwhelming for most Americans and that, often, people don’t take any action because they’re not sure what to do,” she says. “They might have too many messages coming in at them at once, and they’re given a laundry list of things to do or to consider in managing their accounts.”

Yost advises plan sponsors to be strategic about their communications. She sees the advantages in mapping out the main messages they want to share over the course of the year and then breaking down those concepts into what she calls “digestible and actionable” steps. Next, they can set the cadence of how often they are reaching out and can introduce concepts, such as rebalancing, gradually. She also suggests identifying the key audience for different messages by working with recordkeepers to understand the behaviors of the individuals in their plan.

“With more specific messaging, it’s helpful to target individuals for whom the suggested action makes the most sense,” she says.

Get Employees to Take Action

Austin sees plan sponsor methods dividing into two approaches: one focused on finding ways to take the emotion out of retirement investing and a second boosting the idea of regular reassessments by drawing parallels with an annual health checkup.

The numbers bear out the need to persuade many participants to take some kind of action. Alight’s data show that while 70% of plan sponsors offer automatic rebalancing, only about 12% of plan participants select that option. Managed accounts also provide an ongoing rebalancing as part of the service, and about 60% of employers offer them, but take-up is only between 15% and 20% of participants, depending on the industry, Austin says.

“[Rebalancing] not only takes emotion out of it, but it also takes the effort and the time required [out of it],” he says. “Some plan sponsors are going to go ahead and promote [rebalancing] right now.”

The second choice is to promote the idea of an annual review, asking employees to consider their overall financial goals and whether their investments are aligned to reach those goals. In that case, Austin recommends “encouraging individuals to really look at where they are now and where they want to be.”

Yost considers communicating the rationale behind rebalancing as one of the most effective ways to prompt employees to take action. That message should be followed by outlining exactly how to do it, including where to go on the recordkeeping system and what plan participants need to do there, she says.

“That’s the most important thing to get anyone to take action or to make a change,” Yost says. “If they understand why they’re doing it or why they need to do it.”

Reexamine Traditional Approaches

Jared Gross, the New York City-based head of institutional portfolio strategy at J.P. Morgan Asset Management, also sees the importance of establishing the overall objective, then creating a strategic asset allocation to achieve that.

“The presumption with rebalancing is that if you have drifted away from your strategic asset allocation, you want to periodically pull the portfolio back to its strategic allocation,” he says.

In addition to endorsing the general benefits of rebalancing, Gross has been reexamining traditional approaches to rebalancing after an unusual year in which equities markets showed an overall strong return, but one heavily concentrated in a small subset of large-cap U.S. equities. Consequently, there may be potential gains in rebalancing, both within equities and also in fixed income and other asset classes.

This is important because rebalancing is based on the observation that asset class returns tend to revert to the mean over time. Gross suggests that investors keep in mind that “the greater a sector’s outperformance or underperformance, the more likely it will reverse,” he advises. In this case, too, investors may reduce risk.

“If equity valuations are extremely high, the prospects of strong future returns is diminished, so it is prudent to take some of that risk off the table and move it to areas where you are likely to enjoy higher returns going forward,” Gross says.

But given the variation in returns and valuations in the U.S. equity market, Gross sees benefits to maintaining allocations within equities, done in combination with at least one of three potential strategies: shifting capital from passive into more actively managed portfolios that will not be as concentrated; focusing on actively managed small- and mid-cap sectors; or shifting to active value investing strategies. Similarly, in fixed income, given that credit spreads are extremely narrow by historical standards, he says he sees an advantage in actively managed fixed income that can make use of the broadest possible opportunity set.

Don’t Overlook TDFs

The focus on rebalancing is also a subject within target-date funds. Jon Kaczka, a senior vice president and senior asset allocation research analyst at Voya Investment Management, based in New York City, helps oversee $24.6 billion in assets under management in target-date funds, and he highlights the importance of rules-based investment decisions.

“The rebalancing decision should be separated from any type of investment-related decisions,” he says, pointing to a process that establishes asset allocations ahead of time and then minimizes transaction costs and portfolio disruptions.

At T. Rowe Price, the firm communicates to plan sponsors and participants the necessity of a disciplined rebalancing strategy to maintain strategic asset allocation and manage risk, including the benefits of automatic rebalancing in target-date funds, according to a firm spokesperson.

Similarly, the managers of Vanguard’s Target Retirement Fund and Trusts aim to provide consistent exposures that their clients expect, and the funds are designed to be held throughout an investors’ full investment lifetime so managers do not make reactive, tactical changes to the funds’ asset allocations, according to a Vanguard spokesperson. However, after a recent review, in December 2024, Vanguard adopted a new policy: If a fund’s actual asset allocation is more than 200 basis points away from the target, it will be rebalanced to within 175 basis points, up from a previous 200/100 threshold-based rebalancing strategy.

Kevin Hanney, New York-based president and founder of CapitalArts Global, which offers fiduciary services in the U.S. and professional pension trustee services in the U.K., also stresses the need to rebalance but says he understands how professionally managed options like target-date funds and managed accounts can offer a reliable way to ensure asset allocation mixes are maintained.

“It’s important for fiduciaries, plan sponsors, consultants—everybody who has a role to play in the retirement system—to keep a sober view of the markets,” Hanney says. “Part of what we’ve learned over the last 30 years that I’ve been in the business is that no matter how much we try to communicate what are considered to be tried-and-true, reliable ways to manage risk and portfolios, even the best plans may not work under all conditions.”

Hanney saw this play out when he worked at United Technologies and helped develop the Lifetime Income Strategy. The approach combines insurance with investments in an attempt to protect portfolios from the risk when rebalancing investments does not work.

“Strategies like rebalancing all rely on things like the correlations among the assets of your portfolio to be different,” Hanney says. “Unfortunately, when you need the protection the most, investments tend to all go down at the same time.”

Ask the Right Questions

Guiding individuals toward an appropriate target-date fund based on expected retirement age is another option Hanney sees as helping solve the problem of rebalancing consistently. But there, too, target-date funds are no panacea. Data from Alight’s Austin show that while 75% of participants are invested in a target-date fund, only 63% of them are invested in just one, and most invested in just one fund tend to have lower balances, he says.

“Target-date funds are a very blunt tool,” Austin says. “They look at age and age only, and as you get older, people have different investment goals.”

Given the range of options available to participants, Austin urges plan sponsors to push for ongoing re-assessments or investment checkups even for those in target-date funds. He has seen employers tackle this by taking multiple steps, starting with asking: Have your goals and objectives changed since your last check in? How comfortable do you feel overseeing your investments? Would you prefer someone else manage them for you? Do you want to auto-rebalance? How complicated is your financial picture?

“That can get people steered to the right spot without necessarily making an outright recommendation,” he says.   

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