Balancing The Need to Rebalance

Balancing might seem like shelter in a storm of numbers and predictions for the more risk adverse investor. But then, how often to rebalance? Or a more complicated question, how to factor rebalancing into plans based on algorithms or robo-investing.  And, if more investors are asking for information about rebalancing, then what does a plan sponsor need to know about what methods their fiduciaries and investment advisors are using?

In a 2013 study by Fidelity, results showed that almost 90 percent of participants who didn’t rely on advisors had not made a change to their investment allocation in one calendar year, meaning they either weren’t monitoring appropriately and might not be adequately rebalancing their accounts.

One tool some plan sponsors offer is the qualified default investment alternatives (QDIAs). Most balanced funds will fit into that option, and will automatically rebalance. But the one-size-fits-all nature of a QDIA might not take into account time horizons for individual plan participants. So while the QDIA is an option that allows for streamlined serving for plan sponsors, it lacks individualization that many participants need to achieve retirement readiness.

While offering individualized advice about rebalancing may increase the administrative burden on a plan sponsor, a few studies indicate that it may lead to additional investments or increasing percentages of investing.  In a study by TIAA-CREF, greater access to advice led to higher rates of saving by investors and/or those investors revisiting an account more frequently to rebalance.

Some large institutions, like universities, have held high level information sessions aimed at large groups, and followed that with smaller individual meetings. The results showed increased investment in supplemental plans and increase rates of investing.

So how often is too often to suggest to investors that they check their asset allocation? Some advisors, like Vanguard, suggest checking asset balance every year and readjusting when the balance is more than five percentage points.  But, does that take into account major life changes like births, inheritances, a spouses’ loss of income or decreased income (or return to school to remain competitive in their career field)?

Rebalancing should consider changes to short and long term goals, and increasing rates of saving. The companies with new robo-investing products (where funds automatically readjust asset allocations to maximize risk and return efficiency as with risk accounts) have been marketing them as an answer to rebalancing concerns. But while robo-investing can assist in the regularity of rebalancing, they can’t account for unplanned and un-plannable human events.

It’s also important to consider that robo-investing, or investing solely by algorithm, might not be planning to make small adjustments year to year to allow for the incremental shift towards more conservative investing with each year an investor gets closer to retirement. Some, like RetireView, do offer that service.

Some algorithm-based rebalancing programs use drift-based rebalancing, where when a fund shifts away from its target balance, it trims back through selling. Others favor tight constraints and portfolio weights. Others have built in diversification to REITs to hedge inflation.

However, these automatic rebalancing systems may miss key issues. For example, it may be more tax advantageous to rebalance an asset through increased contributions. Rebalancing through increased contributions might not be possible through formula-based funds. They may also not factor the tax implications of charitable contributions in place of selling, which may be more enticing to investors as non-profits become savvier about how to address gifts of stock. 

So what should plan sponsors consider when balancing their advice about rebalancing? TIAA-CREF suggests that plan sponsors consider the following: how much data the plan sponsor has about how retirement ready their enrollees are; which advice is being followed or read by the plan enrollees; the level of satisfaction by enrollees in the frequency and content of the advice they get; and how the online access the enrollees have to their accounts meets their needs.

The appeal of robo-rebalancing is that the fees and costs might be significantly lower. Any plans to change or offer new products to enrollees should consider how administrative fees, as well as investment fees might be impacted.

Additionally, separating regular rebalancing from circumstances that could call for a change in asset allocation might be helpful for plan participants. Looking back to the universities who offered large, broad-based information to groups about rebalancing and asset allocation, followed by individual small sessions could offer a solution for plan sponsors.

A plan sponsor might benefit from working with their financial advisor to identify common major life changes that could benefit from asset reallocation or more frequent rebalancing monitoring. Changes like special needs of parents or children, dramatic changes to the housing market, changes in education cost, or health of a spouse might be common issues that could be addressed in a symposium-like setting. That broader based approach could provide the kind of information enrollees seek, without having a major impact on fees and costs. And, the impact on those enrollees may be similar to what the other universities found when they increased educational events: greater numbers of enrollees and increased contributions. A win for all.