How to Manage His and Hers 401(k) Plans

A little teamwork between you and your partner -- whether you're just married or celebrating your 30th anniversary -- could pay off down the road.

The proportion of married couples with dual incomes has more than quadrupled since 1940, and now accounts for more than 40% of all American families, according to the Bureau of Labor Statistics.

That trend and the slow demise of traditional pensions suggests that many American families have two 401(k) plans these days.

You probably understand the benefits of diversification in such long-term accounts. Over the long haul, maintaining the right exposure to large-cap and small-cap stocks, domestic and overseas issues, bonds and cash can maximize returns while minimizing risk.

If both you and your spouse have 401(k)s, treating them as one big portfolio can make maintaining diversification much easier.

Set Your Goals

First, you'll need a good idea of what your joint asset allocation should be based on your risk tolerance and time horizon. A couple in their early 30s might want to hold an asset allocation somewhere in the neighborhood of 70% U.S. stocks, 15% international stocks and 15% fixed income or cash; an older couple might want a more conservative mix.

You'll also want to make sure your overall portfolio is balanced within the major asset categories. For stocks, make sure you hold exposure to both investment styles (value and growth), various market capitalizations (large, medium and small) and all 10 economic sectors (from information technology to utilities). For bonds, make sure your holdings are diversified by credit quality, maturity and bond issuer.

Lay your two plans side by side and compare them. Consider what categories of investments you might be missing, and whether your existing holdings overlap to result in excessive concentration in one type of stock or bond. Then look to reduce too-large positions and shore up small ones until your allocations are in line with your targets.

Chances are, you'll be able to build a combined portfolio that matches your ideal allocation no matter what kinds of plans your employers provide.

The Two-Plan Advantage

Holding two 401(k) plans may provide opportunities to broaden your investment horizons.

For example, say your plan allows for a great deal of self-direction among scores of funds, while your spouse's offers only a handful of funds. In that case your spouse might invest through one or two very broad funds to provide the core of your joint portfolio, leaving you free to seek greater diversification through more peripheral types of investments, such as small-cap international stocks, REITs or high-yield bonds.

You also may find that each plan offers excellent funds in different categories. For example, say your spouse's plan includes a small-cap fund with a strong long-term record and an investment philosophy that appeals to you -- but your plan's small-cap offering has produced middling returns and charges high fees.

Simple enough: Overweight the small-cap fund with your spouse's contributions, and emphasize something else with yours.