Auto-rebalance: What does it mean?

While the Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for employer-sponsored plans, employers have some flexibility to customize the plan to fit its organization. Customizable features include: employee enrollment eligibility, length of vesting period, existence of employer match, and the variety of investment options.

Another popular feature offered is ‘auto rebalance.’ Auto rebalance allows investors to set up a regular reallocation of their investments if, after a certain period of time, the allocation is ‘off.’

For example, on January 1, 2019 you allocate your funds as follows: 50% in large cap, 25% in international, and 25% in bonds. On December 31 of the same year, based on fund performance, your allocation is 58% in large cap, 22% in international, and 20% in bonds.

If enrolled in auto rebalance, your account will automatically make the necessary trades to align your account with the original 50%/25%/25% allocation. The auto rebalance frequency depends on your plan options but is usually offered quarterly or annually.

Many plans have default investment options, usually a ‘target date fund’ based on age. In such case, auto rebalance doesn’t apply because 100% of your investment is in only one fund.

Ensure your allocation for future contributions (new money going into your account) matches your current balance allocation. It’s easy to forget to update your future contribution allocation during account set up or when making an allocation change. This is an easy way to derail your intended risk profile.

*Pro tips:

1. ‘Dollar cost averaging’ is an excellent way to decrease the average cost per share paid on investments. By making contributions from each paycheck, you are dollar-cost averaging.

2. If an employer match is offer, be sure that you contribute at least enough to receive the full match. This is free money; take it!

3. Set a long-term goal of contributing the IRS’s yearly maximum allowable amount. For 2019, the maximum is $19,000 with an additional $6,000 allowed for those age 50+.

Be aware – check your statements for correct allocations, beneficiary designations, primary address, phone number, email, employer match, and your contribution. It’s easy for a simple clerical error to occur so remember, you are responsible for your own financial future.