By Amy E. Buttell
Life rarely goes as planned. That's why it's always good to have an emergency fund in the bank.
Many working couples juggle two, and maybe more, 401(k) plans. These plans may have similar or wildly different investing options. One spouse may have a plan with limited options, while the other may have a full menu of mutual funds, stocks and other investments through a brokerage window.
In addition to having dissimilar plans, a couple may also contribute at different levels and get varying employer matches. Rather than focusing on each individual's portfolio, a better strategy would be to organize the couple's plans holistically. While coordinating all the investments can be challenging, the payoff is worthwhile because a coordinated asset allocation plan can reap rewards, not the least of which is keeping retirement goals on track.
"Many 401(k) plans aren't very well-diversified, so the couple needs to look at the offerings in their plan and see what asset classes are represented in each one of their plans and try to diversify as much as possible within their overall retirement investing strategy," says Frank Armstrong, founder and principal of Investor Solutions in Miami.
Read on to learn about six ideas for coordinating a couple's 401(k) retirement plans.
Map out an overall asset allocation stretgy
Before you can take the step of diversifying each 401(k) portfolio, you need to know what you're trying to accomplish. Asset allocation is the practice of investing among various asset classes -- stocks, bonds, cash, commodities and other types of investments. Investing in assets that are not correlated to one another helps mitigate risk.
To determine an asset allocation plan that reflects your retirement goals and objectives, consider factors such as the time horizon until retirement, your risk tolerance and overall financial goals, says Ryan Franklin, a senior financial adviser with Moss Adams Wealth Advisors in Seattle.
If you have more than 10 years before retirement, you may be comfortable with a higher allocation to stocks rather than bonds and commodities, say experts. If you're nearing retirement, your accounts will be tapped soon, so you may want to preserve capital by choosing conservative investments.
Be careful to limit the overall portion of company stock in 401(k) plans, cautions Brad Bofford, a financial adviser with Financial Principles in Fairfield, N.J.
A large allocation to company stock exposes you to high risk.
Analyze options from both plans
With that information in hand, take a more in-depth look at the options offered by both plans. "Each plan should be evaluated separately for portfolio offerings; fees and expenses; loads and no-load funds; three-, five- and 10-year returns; and underlying securities," says Ken Rupert of The Vita-Copia Group in Hampstead, Md.
Most company-sponsored retirement plans offer websites with information about each of the fund offerings. Personal finance sites such as Yahoo Finance and Morningstar also can help in the evaluation process. Examine the types of funds held in each retirement plan to make sure they don't have overlapping objectives. For example, you likely don't want U.S.-dominated large-cap funds in both 401(k) plans unless they are somehow very different -- for example, one that focuses on growth stocks while the other invests in value stocks.
Consider assets from all retirement plans
For many couples, the 401(k) plans from current employers are just one part of the retirement investing plan puzzle. You likely have 401(k) plans from former employers, and perhaps assets in traditional or Roth individual retirement accounts.
If you have 401(k)s from former employers, it can make sense to consolidate them into a rollover IRA for each spouse, says Michael Lecours, a financial adviser with Ohanesian/Lecours Investment & Advisory Services in West Hartford, Conn. Consolidating the accounts can result in increased investment options and a simplified portfolio-management process, he adds, as there won't be so many different accounts of which to keep track.
Locate assets in a tax-sensitive manner
Investing strategies are not limited to just picking good funds; it's important to place funds in the most appropriate vehicle. Because 401(k)s are generally tax-deferred vehicles, it can make sense to place assets that are subject to higher tax rates in those kinds of plans and hold other assets in taxable accounts, says Jeff Nauta, a financial adviser with Henrickson Nauta Wealth Advisors in Belmont, Mich.
"Bonds, for example, throw off interest, which is taxed at ordinary income rates, while stock dividends and capital gains are taxed at a lower rate. So bonds are better in retirement accounts than stocks, in that situation," he says.
Christine Fahlund, a senior financial planner and vice president of T. Rowe Price Investment Services, recommends putting aggressive investments in Roth IRAs, where they can grow unrestrained for many years since they don't have to be tapped for required minimum distributions, or RMDs.
Rebalance accounts regularly
Let's assume you have a 50-50 mix of stock and bond investments. Within the stock portion, one-third is in small companies, one-third is in midsize firms and the rest is in large caps. Stocks are cyclical, and they generally don't move in unison. For instance, small- and midcap stocks may experience a big runup in a particular year, so you may discover that your stock holdings have mushroomed to 65 percent of the portfolio. In that case, it's time to rebalance to your original asset allocation, assuming your goals, risk tolerance and time horizon haven't changed.
Many 401(k) plans offer automatic rebalancing, which can help keep each retirement plan allocated proportionally among funds and balanced within original objectives. If that option is available and you haven't signed up for it, it's worth considering, Armstrong says.
If automatic rebalancing isn't available, you'll need to monitor and rebalance all your accounts regularly to ensure your original asset allocation remains in place. This might require summoning help from an accountant or financial adviser, particularly if taxable accounts are involved.
Even if the 401(k) plans are automatically rebalanced, you still need to monitor each account to ensure that any changes to your overall asset allocation strategy are reflected in your retirement plans.
Beware of bad funds
Unfortunately, some 401(k) plans don't offer very good choices, says Armstrong. "A couple may have two plans, one with really good choices and the other with terrible choices," he says.
In that case, it could make sense to max out the good plan to the extent possible and find the best choices of the bad plan, contributing just enough to get the employer match, he says.
Nauta adds that most plans, even the worst plans, usually have at least a "semidecent" bond fund. If it's not too expensive, put the entire bond allocation in the bad retirement plan, and in the better plan, spread out investments over several different types of stock funds.