When it comes to 401(k) plans, savvy investors know that asset allocation based on your time horizon, risk tolerance and savings goal is crucial. But without regular checkups, over time your investments can drift away from that initial allocation. That s where rebalancing comes in.

Say you set up your 401(k) plan to have a 60%-40% stock-to-bond allocation 60% of your portfolio is in stock mutual funds and 40% is in bond funds. You forget about it for a year. In the meantime, the value of stocks has fallen considerably and your allocation shifts to 35% (stocks) and 65% (bonds).

Most experts recommend plan participants rebalance their 401(k)s periodically generally, at least once a year. Rebalancing means adjusting the allocations to the funds in your account back to their original targets with your ideal mix of stocks, bonds and cash.

But the majority of plan participants practice a form of benign neglect: They do nothing. About 85% of participants make no asset allocation changes during the year, says David Wray, president of the Profit Sharing/401(k) Council of America. Inaction is the second biggest mistake participants make, while the biggest is not contributing enough to get the full employer match, says Wray.

Investors should note that taxes are an important advantage when rebalancing. In a regular brokerage account, buying and selling often generates increased taxes each time you rebalance. But there are no tax consequences in a 401(k).

What types of events should act as a potential trigger to rebalance your 401(k) plan? Here are a few:

Big market movements

Big market swings tend to shift your intended asset allocation, so plan participants should make sure they re not too heavily invested in one asset class that has recently outperformed or done poorly, says Dean Kohmann, vice president of 401(k) plan services at Charles Schwab.

For example, say an investor puts 60% of his account in stock mutual funds and 40% in bond funds in the year 2000. If left unattended, by the end of 2002 after the big tech bust the account would have held 41% in stocks and 59% in bonds. Those investors would have lost out on double-digit equity returns from 2003 through 2007 and earned lower returns in bonds, he says. By rebalancing periodically, you increase your rates of return and reduce risk, says Kohmann.

However, using big market movements as a signal to rebalance comes with some risk. There is a tendency to try to time the market selling out of equities when things get too scary and moving into them as market upswings reach their peak, says John Scherer, a certified financial planner with Trinity Financial Planning in Middleton, Wis.

Too much company stock

Generally, company stock should not comprise more than 20% of your overall 401(k) portfolio. If your company is getting negative attention in the news, it might be a good time to ensure your original allocation to company stock hasn t changed because of stock price fluctuations.

I m always advising my clients to make sure they re not too concentrated in their company stock. They have a lot at stake with their company, one, with their job, and with benefits and stock options. To add it into the 401(k) it s a lot, says Timothy Parker, president of Hudson Capital Management, an investment advisory firm in Ridgewood, N.J.

Some companies provide a match not in cash but in company stock. In such a case, your 401(k) could end up with too much in company stock. If your employer matches half of your contribution with stock, your portfolio could be one-third of company stock, says Parker. (For example, if you contribute $1,000 to your 401(k) and your employer matches $500, you have $1,500 -- $500 of which is in company stock.)

Life event

Consider rebalancing if you re married and your spouse gets another job and another 401(k). Say the husband has some good equity fund choices in his 401(k) plan while the wife has good bond fund choices. Parker says he likes to look at the couple s plans together as one investment unit. Why not use best choices in each asset class, he says. Look at both plans as one unit and choose the best options from each.

Similarly, divorce would also be a good time to re-evaluate your 401(k), but be aware of the possibility that the plan s assets may get divided in the divorce settlement, Parker says.

If plan choices change

It s not unusual for a company to change the funds offered in a 401(k) plan. In most cases, if one fund is taken out, another fund, with a similar investment objective, will replace it. But that s not always the case. For example, if your plan gets rid of its high-yield bond fund option which you hold and isn t replacing it with a similar fund, your provider might move you into another default fund if you don t make decision, says Kohmann.

Sometimes an employer will switch plan providers altogether, which would require new investment decisions. You might have to rebalance based on better or more limited choices, or even do some of the rebalancing outside of the 401(k). For instance, if the new provider doesn t have good selections for the bond side of the portfolio, we may allocate more to stocks there and more to the bond side in IRAs, says Erin Baehr, a certified financial planner and owner of Baehr Family Financial.

Proximity to retirement

Rebalancing becomes more critical as you approach retirement. When you re about three to five years away from retirement you want to assume a little less risk, says Lynn Mayabb, a certified financial planner at BKD Wealth Advisors in Kansas City, Mo. But investors also need to remember that if they want to retire at 65, they might have 25 years of retirement. You don t want to go too cautious, Mayabb says.

An investor within five years of retiring should be careful not to let his or her 401(k) plan get too heavily weighted toward equities. If the market fell, they would incur greater losses, and they don t have time to make up the losses and might have to work longer, says Kohmann.