The good news is that 401(k) contributions have increased, according to Fidelity Investments' most recent quarterly retirement savings analysis based on data collected from the 401(k) and individual retirement accounts (IRA) it manages. The bad news is one glaring problem for Baby Boomers: the asset allocation of their 401(k)s is drastically out of balance.

According to the study, 10% of those between the ages of 55-59 had 100% of their assets in stocks. In addition, 11% of those between the ages of 50-54 were 100% allocated to stocks. This allocation to stocks is highly risky because of the volatility of the stock market. If a down market occurs right before retirement, your lifestyle or even the ability to retire can be greatly impacted. (For more, see: What Asset Allocation Should I Use for My Retirement Portfolio?)

The closer you get to retirement the less money you want exposed to the stock market. Instead of an aggressive portfolio, like the 100% in stocks, it is better to have a portfolio that has less exposure to stocks. If you find yourself in the position of having your 401(k) out of balance, then there are a few things you need to do to.

Determine Asset Allocation

Once a year you should be confirming that you have the right asset allocation to reach your retirement goals at the right time. This is more important the older that you get. When you are younger you may go a while without changing your allocation because you have a longer time horizon and can recover from losses. But the closer you get to retirement the more your allocation should change. As you get closer to retirement you will want to decrease your exposure to equities and increase exposure to less risky investments such as bonds and cash. (For more, see: Achieving Optimal Asset Allocation.)

Rebalance Investments

Once you have determined the right asset allocation for you, it is time to rebalance your portfolio. Rebalancing should be done at least once a year, even if your asset allocation has not changed. As the markets go up and down, the percentages of stocks, bonds and cash that you have in your portfolio will also change. If the stock market goes up and bonds stay the same you are now under balanced in bonds and have too much exposure to the stock market. When rebalancing you would selling off the excess allocation to stocks and buying more bonds in order to bring you back to your target allocation. (For more, see: Pick 401(k) Assets Like a Pro.)

Target Date Funds

If all of this seems overwhelming to get right it consider using one of the target date retirement funds offered by your 401(k) plan. With this approach you select the investment that has your retirement year as the target, or one close to it, and the investment company does all the rest. They manage all of the rebalancing and set the right asset allocation for you based on your retirement time horizon. (For more, see: Pick a Retirement Date: Target-Date Funds Will Do the Rest and Index or Target Date Funds in 401(k)s: Which is Better?)

The Bottom Line

While planning and saving for retirement is one of the most important things you can do, the second most is making sure that you have your investments in the right place. This will help ensure that the money you have saved is ready for you when you are ready to retire. Don't end up in a situation where you have to delay retirement because you were over allocated to higher risk investments such as equities. (For more, see: How to Become a 401(k) Millionaire.)