Administration March 3, 2025

When Should Investors Rebalance?

Advisers and managers share the tools and messages that best allow plan sponsors to communicate the need for rebalancing and drive the process.

Reported by

Elizabeth Harris

Art by Claudi Kessels

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.

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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.

Fiduciary Risk Continues to Pose Barrier to Mass Adoption of Alts in DC Plans

Many defined contribution plan sponsors have concerns about offering alternative investments in their 401(k) menu, but a supportive regulatory environment may shift the tide.

Reported by

Remy Samuels

Art by Claudi Kessels

Incorporating alternative investments into defined contribution plans has long been touted as a strategy to allow for more diversification and enhance returns for investors. However, plan sponsors tend to be hesitant to add illiquid assets to their investment menus for a myriad of reasons—most notably cost and litigation risk.

Since President Donald Trump’s 2024 election victory, discussion of incorporating alternative assets, such as private equity and even cryptocurrency, into 401(k) plans has resurfaced. While defined benefit pension funds have historically maintained higher allocations to alternatives, it remains to be seen if DC plan sponsors will offer participants access to alternative investment options, despite concerns related to governance and litigation.

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Bill Ryan, a partner in and defined contribution leader at NEPC, argues that the industry has already administratively solved for the issue of incorporating alts into DC plans. For example, he said Washington has, for the past five years, put private equity into the state’s DC plan through target-date funds, and the University of California Retirement Plan historically had private equity target allocation in a target-risk fund.

“Most large-cap active growth managers have less than 5% in a private placement or private equity in their mutual funds already, so private equity and private markets are in DC plans and are fully functioning,” Ryan says.

Fiduciary Risk

However, Ryan says there is an “asymmetric risk” to the fiduciary when offering any sort of alternative investment option because the reported fees tend to be the highest when the investment performs the best.

The Employee Retirement Income Security Act requires plans to update their investment fee disclosures, so if private markets outperform public equities, it may show that the fees went from 60 basis points to 120 basis points, for example. Even though this may have been a positive outcome for participants, plaintiffs’ attorneys may feel inclined to sue the plan sponsor because of the large fee increase.

In a U.S. Supreme Court case against Intel Corp. in 2021, plaintiffs alleged that the investment policy committee breached its fiduciary duties by investing a significant portion of the plan’s assets in risky and high-cost hedge fund and private equity investments. However, in 2022, Intel Corp. won the case, as the Supreme Court ultimately ruled that a prudent fiduciary that properly evaluates the risk and returns of alternative investments can add them to the 401(k) menu if, after an objective and thorough process, the decision is in the best interest of participants.

“It’s not that we can’t administratively deliver private markets,” Ryan says. “It’s these ancillary things that are hangnails that intimidate plan sponsors from doing it.”

Ryan emphasizes that higher fees are not necessarily a bad outcome for participants, but it can be risky for the plan sponsors because such fee disclosure often leads to litigation. Plan sponsors often do not get the chance to defend themselves and justify that the investment performed well and the fees were reasonable until they are in court.

Amy Keiser, vice president of retirement product and solutions at Principal Financial Group, says plan sponsors have a fiduciary duty to understand and evaluate alternative investment options relative to other investments the plan offers. As a result, Keiser says, plans need data measuring performance, price and risk, and recordkeepers need to be able to deliver this data to plan sponsors.

She adds that retirement plans are made up of a range of investors, including some who are financially savvy and sophisticated investors, and others who are new to investing or lack financial confidence. When offering alternative investment options, within a target-date fund or as stand-alone offerings, Keiser says it is important to for plan sponsors to consider how they will educate all participants about the investments and provide them the tools they need to make the best decisions.

“Naturally, when people want to get their money out [of the plan], or they want to take a loan … they may have questions, so our call center agents and our digital experiences need to be able to help them to understand if there [are] unique features around the alternative investment,” Keiser says. “Depending on how it’s structured, there could be a liquidity [issue] that needs to be addressed.”

She notes that small-to-medium-sized businesses often do not have time to thoroughly evaluate these investment options, so having an adviser or an independent third-party investment fiduciary company may be beneficial.

Regulatory Environment

Ryan said the Trump administration will create more regulatory support for private markets and provide a pathway for more adoption of alts in DC plans over the next four to five years.

“But the risk is: What happens in seven or eight years … when there’s a new administration?” Ryan says. “At that point, you’re already invested in these private market vehicles, [and] you may or may not be able to get out of them.”

Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, says there is an opportunity for policymakers to create a safe harbor that allows for alternatives in DC plans.

“There’s nothing in ERISA that prevents plans from adding alternatives, and many already have,” Cohen says. “But there are certainly various things that regulators and the Department of Labor could at least signal [their support of] or support plans consider[ing] this.”

Cohen argues that litigation risk is one of the biggest obstacles preventing widespread adoption of alts in DC plans.

“Whether it’s investments, retirement income [or] advice … we are continuing to see innovation stalled by plan sponsors,” Cohen says. “Now we’re seeing even with [environmental, social and governance factors], there is litigation risk. So I think if there’s an ability to reduce the amount of frivolous lawsuits, while still giving participants the right to pursue claims when there [are] breaches of fiduciary duty, I think that could go a long way … to make the ground more fertile for innovation.”

But Cohen says the “fiduciary case is there” to offer alternatives in DC plans, as ERISA requires plan sponsors to do what is in the best interests of participants, and constantly worrying about reducing a company’s fiduciary risk is not always the best way to do that. The fiduciary environment of an ERISA retirement plan could be the “perfect place” to offer such investments, he says. Otherwise alternative asset classes tend to only be available to high-net-worth investors, because the average American may not pass wealth-based sophisticated investor rules that limit some investments to people with a higher net worth.

“You have professionals overseeing this, [and] oftentimes they’re in professionally allocated vehicles like a target-date fund, and plans can use their buying power to reduce fees,” Cohen says. “Even if participants could get access to this outside of the plan, it would be much more expensive than what they could get in the plan. And again, many aren’t even allowed to get access. So I think there is a real fairness issue too.”

Target-Date Fund Solutions

Cohen says it is most common for plans to offer alternatives as part of a multi-asset solution, such as a target-date fund.

Lockheed Martin Investment Management Co., for example, began including a private equity co-investment sleeve in the TDFs of the company’s DC plans. Private equity was incorporated into the plan’s TDFs officially in July 2024, and the investment committee is gradually investing in the private equity funds over a two-year period until it reaches target allocations.

The most aggressive TDFs in Lockheed’s lineup only have about 7% invested in a private equity fund, and the less-aggressive TDFs have very little or no investment in private equity. Neuberger Berman was selected by Lockheeds’ investment team to partner on the co-investment sleeve. The co-investment sleeve also has daily net asset value pricing, which provides significant liquidity.

Ryan notes that Lockheed Martin is in an advantageous position to offer this sort of investment, as the company works with an investment staff and has experience with private equity in the firm’s DB plan. He says the level of sophistication and governance would be difficult to replicate at a smaller company.

Among DC plans that offer alternative investment options, Cohen says private real estate is “leading the way” because the private real estate industry has established more standards for trading and valuations.

“There’s really been a movement toward a standardized approach that’s gotten people very comfortable, and it’s well documented and consistently applied,” Cohen says. “Now you’re seeing momentum in other asset classes using similar concepts … that the private real estate industry has been able to develop over about the last decade. As a result, you’re seeing greater interest in things like private debt. I think [that’s] going to be the next area where you’ll see the most activity.”

Overall, Ryan says private markets are in DC plans today, and more adoption is anticipated.

“Access is extremely important, especially with a very [pro-alternatives] administration, and we anticipate an uptick in flows and adoption, but it should be mindful, with the appropriate governance around it,” he says.