Husband and Wife 401(k)s? Here's How to Manage Them

August 9, 2010
Michael Sheehan

A reader and his spouse have dual 401(k) retirement accounts and want to know the best way to manage their combined assets.

Q: My wife and I both have 401(k) retirement accounts. What’s the best way to manage the assets?A: If you’re married and your spouse also has a 401(k), it’s a good idea to think of the two plans as one when you’re thinking about asset allocation. Take a look at the investment choices in both plans. If one has a better line-up of equity funds, you can choose that for the stock portion of your asset allocation and then use the other account to diversify your fixed-income holdings. The same reasoning applies if one has a better range of bond-fund options.

There are two big mistakes that 401(k) plan participants typically make, according to financial advisors. The first is not putting enough money into the account, especially if an employer matches all or part of the contribution. (With an employer match, you should be putting in at least enough to earn the maximum match amount.) The second mistake is making regular contributions and then forgetting about them. According to some estimates as many as 85 percent of 401(k) participants make no changes in their investments in a typical year.

You and your spouse should start by setting an asset allocation. Assuming your 401(k) investment choices include both stock and bond funds, you should come up with a formula to divide your assets between these two options. Say you set up a 60/40 split between equities and bonds. If the stock market takes a big hit, your asset allocation goes out of kilter. That’s a good time to rebalance the assets in your 401(k) to restore that 60/40 allocation you originally set. Asset-allocation calculators, such as this one from Bankrate.com, can help you find the right mix. If you’re uncertain whether your holdings are properly diversified, Morningstar.com has an excellent tool that will “x-ray” your portfolio to show you where you may be too heavily invested.

As you approach retirement, you should both think about putting more of your contributions into less risky assets, say financial advisors. As many discovered in 2008, a 401(k) that’s overloaded with stocks can implode, leaving older employees little time to make up the loss. On the other hand, some exposure to risk may be appropriate, since you’re trying to add to a retirement stash that may have to last 25 or 30 years after you quit working.

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