The best mutual funds for 401k plans are generally index funds with low expense ratios and actively managed funds with good long-term track records.
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The biggest players in the employer-sponsored-plan business also happen to be the providers of the best mutual funds for long-term investors in general — Vanguard, Fidelity and American Funds.
If some or all of your 401k mutual funds come from one of the big three fund companies, or some combination thereof, you’re probably in pretty good shape. But there are a few outstanding, lesser-known companies that offer some fantastic mutual funds for 401k plans as well.
And no matter where your 401k investment choices come from, some mutual funds are better than others when it comes to saving for retirement.
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With these key points in mind, we’ve highlighted the best mutual funds to look for in a 401k plan.
Note: In 401k plans, assets are held at the trust level. For this reason, there is no minimum initial investment at the participant level.
Best Mutual Funds for a 401k Plan: Vanguard 500 Index (VFINX)
Expenses:0.14%, or $14 annually per every $10,000 invested
Minimum Initial Investment:$3,000*
When building a long-term portfolio, it’s smart to begin with a low-cost, passively managed stock fund like Vanguard 500 Index Fund (MUTF:VFINX).
From a fiduciary perspective, S&P 500 index funds like VFINX are prudent 401k funds because they are diversified and easy to understand for plan participants, who are often individuals who have never invested before.
There is arguably no better way to begin the retirement planning journey than with a fund that invests in roughly 500 of the largest U.S. companies like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
Best Mutual Funds for a 401k Plan: American Funds Growth Fund of America(AGTHX)
Expenses:0.66%
Minimum Initial Investment:$250
Load: 5.75%
Some investors prefer actively managed large-cap stock funds over S&P 500 index funds and this makes American Funds Growth Fund of America (MUTF:AGTHX) a smart choice for 401k plans.
Other than its status as an outstanding long-term investment vehicle, AGTHX is a popular fixture in 401k plans because it is one of the best broker-sold funds on the market. And since no-load funds don’t have revenue sharing capabilities, brokers turn to American Funds for their 401k clients. This makes AGTHX, and other share classes of the same fund, a win-win for investors and plan fiduciaries.
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As for the portfolio, AGTHX has a balanced combination of large-cap U.S. stocks like Amazon.com, Inc. (NASDAQ:AMZN) and GOOG, with about 10% allocated to foreign stocks like Broadcom Ltd (NASDAQ:AVGO).
Best Mutual Funds for a 401k Plan: Dodge & Cox Stock(DODGX)
Expenses:0.52%
Minimum Initial Investment:$2,500
In addition to an S&P 500 Index fund and a large-cap growth stock fund, many 401k plans include high-quality large-value funds like Dodge & Cox Stock (MUTF:DODGX).
DODGX is led by a team management approach, which looks to buy large-cap stocks that are temporarily underappreciated by the market but can see growth in the long term. This value style has led the team at DODGX to recent top holdings Charles Schwab Corp (NYSE:SCHW), Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC).
Although the value style has the fund leaning toward the financial sector, which was hit hard during the 2007-2008 credit crisis, DODGX is crushing the S&P 500 Index now (18.8% vs 13.7% for one-year returns) and in the long run (9.3% vs 8.8% for 15-year returns).
Best Mutual Funds for a 401k Plan: Vanguard Total International Stock Index(VGTSX)
Expenses:0.18%
Minimum Initial Investment:$3,000
To keep things simple in 401k plans, it’s smart to offer only one international fund, and Vanguard Total International Stock Index (MUTF:VGTSX) is the smart choice here.
VGTSX passively tracks theFTSE Global All Cap ex US Index, which consists of about 6,000 non-U.S. stocks like Nestle (OTCMKTS:NSRGF), Samsung (OTCMKTS:SSNLF) and Royal Dutch Shell (OTCMKTS:RYDAF).
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Although the average market cap leans to the large side, VGTSX covers the total non-U.S. equity market, which includes small- and mid-cap international stocks. This diversification makes for a solid one-fund solution for a portfolio of mutual funds in a 401k.
Best Mutual Funds for a 401k Plan: Vanguard Extended MarketIndex(VEXMX)
Expenses:0.21%
Minimum Initial Investment:$3,000
401k investors looking for the perfect complement to an S&P 500 index fund can find what they need in Vanguard Extended Market Index Fund (MUTF:VEXMX).
VEXMX passively tracks the S&P Completion Index, which covers U.S. stocks not held in the S&P 500 index. This means shareholders can complete the entire U.S. equity market with an S&P 500 index fund and VEXMX.
The fund holds over 3,200 stocks and the benchmark index is cap-weighted, which will make the larger mid-caps like Tesla Inc (NASDAQ:TSLA), Liberty Global Plc (NASDAQ:LILA) and Las Vegas Sands Corp. (NASDAQ:LVS) a higher allocation of fund assets than the small-caps.
Best Mutual Funds for a 401k Plan: Vanguard Total BondIndex(VBMFX)
Expenses:0.15%
Minimum Initial Investment:$3,000
Vanguard’s index funds work well for 401k plans and Vanguard Total Bond Index (MUTF:VBMFX) is no exception.
When it comes to investing in 401k plans, and almost anywhere else for that matter, it’s smart to keep things simple. This rule extends to the fixed-income universe as well.
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Investors get exposure to the entire U.S. bond market with VBMFX, which passively tracks theBloomberg Barclays U.S. Aggregate Float Adjusted Index, thereby covering over 8,000 U.S. bonds.
Best Mutual Funds for a 401k Plan: Fidelity Balanced(FBALX)
Expenses:0.55%
Minimum Initial Investment:$2,500
Although Vanguard’s index funds are smart holdings for long-term investors, Fidelity offers some of the best mutual funds on the active side and Fidelity Balanced Fund (MUTF:FBALX) is a standout.
Certainly life-cycle funds, also known as target date retirement funds, deserve a mention (and even better, an article of their own) in a list of best mutual funds for a 401k plan, but an outstanding balanced fund like FBALX is a smart choice.
The portfolio for FBALX can be considered a moderate allocation with about two-thirds stocks, mostly large-caps like AAPL, Autodesk, Inc. (NASDAQ:ADSK) and GOOG, and one-third bonds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although some of his client accounts hold VFINX,VBMFX, and FBALX. Under no circ*mstances does this information represent a recommendation to buy or sell securities.
*Editor’s Note: Minimum Initial investment figures are listed here for the purposes of any reader who may want to buy the fund outside of a 401k.
