Taking Care of Your 401(k)

Most 401(k) plans offer about 15 choices in a mix of stocks, bonds and money market funds. Even with that relatively limited selection, you should still apply conventional portfolio allocation strategies.

For example, younger people can generally pick investment funds with a more aggressive approach, putting more money into equity funds than bond ones.

The average 401(k) investor has money in 4.1 different funds, but all too often, people don't take the step of rebalancing their allocations each year, which can easily be done by telephone or online at the plan sponsor's Web site.

"You don't need a Ph.D. in economics," says Tom Gryzmala, a financial planner in Charlottesville, Va. "A 401(k) gives you all the benefits of diversification. A 25-year-old guy with an 80-20 mix of growth stocks and bonds has a different outlook than somebody who's about to retire."

Schwanbeck is a big fan of life cycle funds -- mutual funds that invest in stocks and bonds, and adjust their allocations monthly based on investors' age and risk tolerance. Most major fund companies offer them, making it that much easier to adjust your holdings.

What's harder is having the discipline to sell your best performers and reallocate to asset classes that did poorly in the past. That doesn't mean being a slave to the percentages of traditional asset allocation models. Don't be afraid to cut a dud fund loose.

Finally, if you work for a company that uses its own stock for employee matches, avoid letting it become too much of your 401(k) portfolio, warns Cassidy, pointing to the epic collapse of Enron, which gutted the retirement accounts of thousands of employees with heavily concentrated retirement accounts. "Keep selling it off to diversify," Cassidy says.

Concentrating in company stock is also risky even if your employer is doing well. "By investing in only company stock, you are subject to a great deal of price volatility," notes Schwanbeck. "Chances are you wouldn't put all your savings into the stock and bonds of some other company."