To rebalance your 401k with a target date fund, you do absolutely nothing because the fund automatically adjusts your investments over time, whereas using individual index funds requires you to manually buy and sell assets to reset your original target allocation. The choice depends on whether you prefer a hands-off, automated strategy or a manual, custom approach to managing your asset mix.
The structural differences in how rebalancing works
Rebalancing is the process of resetting the weight of your investments when market movements shift your portfolio away from your preferred risk level. If stock prices soar, your portfolio can quickly become too aggressive. If stock prices plummet, you might find yourself holding too much conservative cash or bonds.
A target date fund functions as a single, self-contained investment vehicle that manages this entire cycle on your behalf. Inside the fund, a professional manager maintains a diversified blend of global stocks and bonds that matches a specific retirement year. As you age, the fund automatically executes internal transactions to shift from an aggressive growth strategy to a conservative income strategy. This shifting process follows a predetermined glide path, which completely removes the need for you to track asset weights or log in to place manual trades.
Using individual index funds shifts 100 percent of the portfolio management responsibility onto your shoulders. You must build your own asset allocation by manually selecting separate funds, such as a total stock market index, an international stock index, and a total bond market index. Over the course of the year, these individual funds will grow at different speeds based on market conditions, which distorts your original strategy. To fix this distortion, you must personally calculate the percentage drift and execute the trades necessary to bring your portfolio back into proper alignment.
Step-by-step methods for both investment paths
Your approach to rebalancing will look entirely different depending on whether you choose a single-fund solution or a DIY index portfolio.
The target date fund path (Hands-off)
- Select your target retirement year: Pick the fund that aligns closest to the year you turn age 65. For example, if you plan to retire around the year 2055, you would place your money into the 2055 target date fund.
- Consolidate your balance: Move 100 percent of your current 401k balance into that single fund. Mixing a target date fund with other individual index funds breaks the internal allocation and ruins the automated rebalancing benefit.
- Monitor the asset glide path: Check the fund documentation once a year simply to understand how the internal ratio of stocks to bonds is changing as you draw closer to your retirement date.
The individual index fund path (Manual DIY)
- Establish your target percentages: Write down your ideal investment mix based on your age and risk tolerance, such as 70 percent US stocks, 20 percent international stocks, and 10 percent bonds.
- Calculate your current asset drift: Log into your account annually to find your actual percentages. If US stocks have surged and now make up 80 percent of your total account, your portfolio has drifted by 10 percent.
- Execute the rebalancing transactions: Use your 401k portal to trade your overperforming assets for your underperforming ones. You can do this by selling a portion of your US stock fund and using the cash to buy more of the international and bond funds until you hit your original target ratio.
The automatic contribution adjustment feature
The most common mistake savers make when managing individual index funds is forgetting to update their ongoing payroll contribution settings after they rebalance their existing account balance. Rebalancing your current portfolio balance only fixes your past money.
If you leave your automatic monthly contribution settings untouched, your fresh paycheck deposits will continue flowing into the market using your old, incorrect percentages. Within a few months, your portfolio will drift right back out of alignment.
To avoid this trap, always look for an account feature called automatic rebalancing within your workplace 401k portal. Many modern retirement platforms allow you to turn on this tool for individual index portfolios. Once enabled, the platform will automatically recalculate your asset weights and execute the necessary trades every three, six, or twelve months without your manual intervention. This grants you the low-cost benefits of individual index funds while mimicking the automated convenience of a target date fund.