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How to Manage His and Hers 401(k) Plans

Teamwork can bring in more money over the long haul.

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


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.

Make It a Priority

If a fund or category you want isn't available in either plan, you may want to investing in it through a taxable brokerage account. That said, 401(k) plans' tax benefits mean funding the plans to the maximum level allowed by the IRS ($15,500 each in 2008) should be a high priority for most investors.

Which brings us to one final issue: If you're unable to max out both plans, treating two plans as parts of a larger portfolio can help you decide which to fund more.

Generally, you should take the biggest employer match first. Then favor whichever plan offers you the best investment options -- including the funds with the most attractive risk-adjusted performance relative to their peer groups, the lowest costs and the investment strategies that make the most sense to you.

Mike Woelflein is a business and personal finance freelance writer. A former senior industry specialist with Standard & Poor's and managing editor of ColoradoBiz magazine, he has also written for The Denver Post and American Express.