Video More video In the second of Five Tips’ three-part series, CNN's Gerri Willis reports on how to clean up your nest egg. Play video

NEW YORK (CNN/Money) - New research conducted by Fordham and NYU professors found that 62 percent of 401(k) plans offered inadequate choices. In fact, their study says your 401(k) has such serious limitations it could ultimately cut your potential savings by as much as a third.

In today's Five Tips, we bring you Part II of our three-part series "Cleaning up your financial act." Learn how to straighten up your nest egg and get the mutual funds you need.

The problem is diversity. "Many 401(k) plans are limited to three aggressive growth funds...or a few funds that are of the same fund type," according to Professor Ed Elton, one of the authors of the study. Elton says you want options that enable you to diversify your portfolio in order to earn a reasonable, steady return.

Take a look at your mix to see what you're missing. Ideally, your 401(k) should have some exposure to small-capitalization value, small-cap growth, large-cap value, large-cap growth, bonds, international equities and international bonds. You can still be diversified while holding just a few funds, as long as the funds themselves are diversified. To learn more about mutual funds, check out the CNN/Money Mutual Funds page Morningstar.com.

Diversity helps lower the risk in your portfolio. But each investor has her own level of risk that she can tolerate. In figuring out how to allocate your funds in your 401(k), you will need to determine how much risk you feel you can take. Younger investors can afford to take more risks because they have more time until retirement. However, experts recommend investors nearing retirement take a more conservative approach.

If you have more than ten years to retirement, you might try an allocation with 70 percent stocks and 30 percent bonds like the model 401(k) that Certified Financial Planner Doug Flynn gave us. If you have ten years or less to go until your golden years, you might take the more conservative approach with Flynn's mix of 60 percent stocks and 40 percent bonds.

When you have settled on an allocation plan, "You also should rebalance it at least once a year, or even quarterly," says Jim Platania, a Mount Prospect, Illinois-based certified financial planner.

Rebalancing is adjusting your portfolio's investments to match your original allocation. The markets will shift your allocation naturally as you make gains in some areas and losses in others. By rebalancing, you'll automatically gather your gains and cut your losses.

Don't despair when your 401(k) has limited options. "You can fill in any weaknesses in your 401(k) by investing on the outside," says Elton.

Pick up the mix of investments you are missing through a Roth IRA or a regular non-deferred account. For example, if your plan offers no international funds, you can open an IRA with the purpose of investing in them. (You can contribute up to $4,000 this year into a Roth IRA, or $4,500 if you are 50 or older.)

Or you might open a non-deferred account to invest in say, a large-cap growth mutual fund because you also lack that type of investment in your 401(k).

Timing the market is tricky and most financial planners advise against it. They say you should hold on for the long haul. However, sometimes some mutual funds just don't perform well. Riding out a mismanaged fund could hurt your potential earnings.

How do you know when to dump a fund? Platania says, "At the end of the second year, if you think a fund is an under-performer, compare it to its peer group." If other funds like yours performed far better, it's probably a good time to fold on that fund.

However, if all the other funds in its class had similar returns, "It may just be a down year for those kinds of funds, and you're going to see those," says Platania. But if you are diversified, downturns in one part of your portfolio will be countered by gains in another.

If you check your 401(k) returns everyday, it'll be easy to be disappointed. You're better off checking less frequently -- say once a month, or if you've got decades to retirement, once a quarter. Once you start seeing your investment grow, you'll be motivated to continue investing and possibly, even up the ante on your monthly contribution. Keep at it. Long-term investing rewards the patient.

Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.