10 of the Best-Performing 401(k) Funds

The 401(k) is a go-to retirement savings vehicle, and these funds can help focus your strategy.

When selecting your 401(k) asset allocation, investors should be wary of fancy-sounding funds with complicated strategies. Given that most actively managed funds fail to outperform an index over the long term and that many stock picks fail to beat risk-free Treasury bills, this makes sense. For most investors, selecting the right fund boils down to two factors after figuring out risk tolerance and time horizon: fees and diversification. This means sifting through the vast selection of funds to find broad-based index funds charging low expense ratios. When it comes to your portfolio’s long-term returns, mitigating easily controllable risk factors like high fees and under-diversification is key. Sometimes, maximizing performance comes down to making consistent contributions and staying the course, which is easier when you hold broadly diversified, low-cost holdings. Here are 10 of the best funds that investors can choose for their 401(k)s.

Vanguard Balanced Index Fund Admiral Shares (ticker: VBIAX)

Investors seeking a balanced option for their 401(k) can buy VBIAX, which holds a 60/40 portfolio of U.S. stocks and U.S. investment-grade bonds. The 60/40 allocation is suitable for investors with a medium risk tolerance and time horizon. An example of this could be an investor in their 40s with another 15 to 25 years until retirement. Historically, the 60/40 portfolio has offered a great blend of risk and return. The stocks drive good performance, while the bonds dampen volatility and reduce drawdowns during market crashes. However, the portfolio does suffer in rising-interest-rate, inflationary environments when stocks and bonds fall together. VBIAX costs an expense ratio of 0.07%, or $7 annually for every $10,000 invested, and requires a $3,000 minimum investment.

Vanguard Institutional Index (VINIX)

Younger investors with a high risk tolerance and long time horizon can consider sticking their 401(k) in an S&P 500 index fund like VINIX and letting it ride for 30-plus years. This is an aggressive strategy best suited for those who can withstand crashes without the urge to panic-sell. Going all in on the S&P 500 is a bet on continued U.S. large-cap stock performance. As Warren Buffett said: “Never bet against America.” Since its inception in 1957, the S&P 500 has returned an annualized 10% with dividends reinvested, even after numerous crashes like Black Monday in 1987, the 2000 dot-com bubble and the 2008 financial crisis. This is a fantastic long-term return difficult for even hedge funds to beat. The fund costs an expense ratio of 0.035%.

Vanguard Wellington Fund Investor Shares (VWELX)

VWELX is Vanguard’s oldest mutual fund and one of the most popular 401(k) choices for balanced investors. This fund operates a 67/33 stock/bond allocation, which is slightly more aggressive than the traditional 60/40. In terms of composition, the fund skews toward large-cap value stocks as opposed to the usual large-cap blend seen in most broad-market funds. Seventy-five percent of the fund’s bond allocation is to investment-grade corporate bonds, with the remainder in U.S. government Treasurys. Since its inception in 1929, the fund has returned an annualized 8.23%, which is outstanding when considering its longevity. VWELX costs an expense ratio of 0.24%, or $24 for every $10,000 invested, and requires a minimum investment of $3,000.

Fidelity 500 Index Fund (FXAIX)

If your 401(k) plan offers it, FXAIX might be a great alternative to VINIX due to its lower cost. The fund charges a rock-bottom expense ratio of just 0.015%, compared with VINIX at 0.035%. For a $10,000 investment, this works out to $1.50 in annual fees versus $3.50. While this might seem small, it could amount to a larger difference over long periods of time, especially if your portfolio is large. For a $1 million portfolio, FXAIX would cost $150 annually versus VINIX at $350. Given that both indexes track the S&P 500, the lower-cost option is usually a better pick if it is available in your 401(k) plan. Since the fund’s inception in 1988, FXAIX has returned an annualized 10.3%.

Fidelity U.S. Bond Index Fund (FXNAX)

Investors who opt for FXAIX will likely require a bond allocation as they age and their risk tolerance and time horizon narrow. A great option here is FXNAX, which holds a portfolio of U.S. bonds with an intermediate duration of 6.29 years. This is a measure of interest rate sensitivity, with FXNAX expected to lose 6.29% if rates rise by 1%, and vice versa if rates fall. Forty-one percent of FXNAX is held in U.S. Treasurys, with 24% in investment-grade corporate bonds and 27% in mortgage-backed securities. Holding an allocation of FXNAX alongside a stock fund can help investors reduce portfolio volatility and drawdowns during market crashes. FXNAX costs an expense ratio of 0.025%.

Fidelity Freedom 2050 Fund (FFFHX)

For millennials in their 30s, a target-date fund like FFFHX could be a great one-stop-shop solution for a 401(k). This fund automatically adjusts its allocation of stocks to bonds on a “glidepath,” gradually becoming more conservative as the target date of 2050 nears. Right now, the fund is 87% stocks and 13% bonds, which reflects the longer time horizon and higher risk tolerance of its intended investor demographic. As investors grow older, FFFHX will gradually reduce its stock allocation while increasing its bond allocation to decrease risk and volatility. This mitigates sequence-of-returns risk, which is the chance of a series of bad returns occurring right before retirement. FFFHX costs an expense ratio of 0.75%.

PIMCO StocksPLUS Long Duration Fund (PSLDX)

PSLDX is one of the rare funds to have consistently outperformed the market since inception. As an actively managed fund, PSLDX can be described as having a 100/100 stock/bond split. This is essentially a 50/50 stock/bond fund on two times leverage. PSLDX achieves this by buying S&P 500 index derivatives along with long-duration bonds. The two assets have a negative correlation with each other, along with high volatility and positive expected returns. The result is a fund that has beaten the S&P 500 with a 13% annualized return since inception in 2007. However, the fund is intended for institutional investors and is not available in every 401(k) plan. If it is available, expect a minimum investment requirement and additional transaction fees. The fund charges a 0.59% expense ratio.

T. Rowe Price Retirement 2030 (TRRCX)

Investors looking to retire in the next 6-8 years should generally opt for a more conservative asset allocation. As noted earlier, sequence-of-return risk is what to watch out for. A market crash coupled with a prolonged bear market prior to retirement can decimate your 401(k) value and potentially delay retirement by many years. A good practice here is to select a fund with a higher bond allocation, and TRRCX is suitable for this purpose. Right now, the fund is 67% invested in U.S. and international equities, with 16% in investment-grade bonds, 10% in international and high-yield bonds, and 6% in cash. TRRCX charges an expense ratio of 0.58%.

Dodge & Cox Stock Fund Class l (DODGX)

DODGX can best be described as a medium- to large-cap stock blend with a value-stock tilt. The fund tracks two benchmarks: the S&P 500 and the Russell 1000 Value Index. DODGX attempts to select stocks that appear to be temporarily undervalued by the stock market with a favorable outlook for long-term growth. The fund screens picks based on a company’s financial strength; competitive advantage; environmental, social and governance, or ESG, record; and management effectiveness. Despite the active management, the fund’s turnover is fairly low at 9%. DODGX charges an expense ratio of 0.51% and has a minimum $2,500 initial investment. The fund has returned 9.06% annualized over 20 years, net of fees.

American Funds EuroPacific Growth (AEPGX)

Investors looking to diversify their 401(k) allocation outside of U.S. stocks can consider international stock funds. These funds hold stocks from developed and emerging markets. Holding some international stocks can help mitigate the chances of the U.S. stock market performing poorly for an extended period. Case in point: U.S. markets lost to emerging markets every year from 2003 to 2007, with the latter posting double-digit returns each year. A good fund to buy here is AEPGX, which holds 85% of its allocation in non-U.S. equities from Europe, the Pacific, Canada and Latin America. The fund costs an expense ratio of 0.8%.

10 of the best-performing 401(k) funds:

— Vanguard Balanced Index Fund Admiral Shares (VBIAX)

— Vanguard Institutional Index (VINIX)

— Vanguard Wellington Fund Investor Shares (VWELX)

— Fidelity 500 Index Fund (FXAIX)

— Fidelity U.S. Bond Index Fund (FXNAX)

— Fidelity Freedom 2050 Fund (FFFHX)

— PIMCO StocksPLUS Long Duration Fund (PSLDX)

— T. Rowe Price Retirement 2030 (TRRCX)

— Dodge & Cox Stock Fund Class l (DODGX)

— American Funds EuroPacific Growth (AEPGX)

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10 of the Best-Performing 401(k) Funds originally appeared on usnews.com

Update 09/12/22: This story was published at an earlier date and has been updated with new information.