The 401(k) is a go-to retirement savings vehicle, and these funds can help focus your strategy.
When selecting funds for your 401(k), simple is usually better. Actively managed funds with complicated investment strategies often underperform index funds over the long term, and they’ll charge you more to do it through higher expense ratios. Instead, for the most reliable long-term success, opt for funds that offer broad diversification at a low cost. This often means choosing index funds and taking a broader perspective when evaluating performance. While active funds may excel in one year, retirement is a long game that requires reliable performance over decades. For that reason, the best-performing 401(k) funds are the ones that have excelled over the past 10 or more years. Here are 10 of the top funds to include in your 401(k).
Fidelity Advisor Growth Opportunities Fund (ticker: FAGAX)
If performance is what you’re after, growth funds are your best friend. This large-growth fund has consistently delivered results over time, as FAGAX’s annualized 10-year return is 15.3%, putting it in the top quartile of its large-growth peers, according to Morningstar. The fund has a heavy domestic tilt, but it also has almost 10% in foreign equity. Currently, FAGAX is overweight in technology, communication services and energy relative to its category peers. Many of the usual large-cap names are in the top 10, including Microsoft Corp. (MSFT), Google parent company Alphabet Inc. (GOOG, GOOGL) and Amazon.com Inc. (AMZN).
JPMorgan Large Cap Growth A (OLGAX)
Another front-runner in the large-growth category is OLGAX. Running neck-in-neck with FAGAX, OLGAX has returned 15.3% over the past 10 years, making it another top-quartile performer in its asset class. OLGAX has an even heavier domestic tilt at nearly 93% U.S. equity and less than 1% foreign equity. It’s overweight in health care but underweight in communication services and financial services. Familiar names top the holdings list with Apple Inc. (AAPL), Microsoft and Alphabet the top three, but these are followed by less familiar names like pharmaceutical research and development company AbbVie Inc. (ABBV). OLGAX gets five stars from Morningstar.
Fidelity 500 Index Fund (FXAIX)
Many investors like to start their 401(k)s with an S&P 500 index fund, which allows broad, U.S. large-cap market exposure. Index funds are particularly good choices if you’re not going to be actively reviewing your account. Index funds are also very cheap, which matters for long-term holdings. FXAIX, for example, has an expense ratio of only 0.02%. The index includes about 500 of the largest U.S. stocks that make it through the asset manager’s screen for market cap, liquidity and profitability, which gives the fund a slight quality tilt. But be sure to pair this one with a foreign fund since you’re only getting exposure to large U.S. companies. The fund has a 10-year trailing return of 14.6%. It also gets five stars from Morningstar.
T. Rowe Price Blue Chip Growth Fund (TRBCX)
For a slightly more flexible approach to large-cap stocks, consider TRBCX, which seeks long-term capital growth by investing in blue-chip growth companies. While the fund is still firmly in the large-cap growth category, the ability to shift into medium-sized companies could give the managers a leg up, as smaller companies have greater long-term growth potential. The fund has a mix of aggressive and steadily growing companies, but seeks out high-quality companies, too, as a blue-chip fund. Among some of the top holdings are Apple and Microsoft. TRBCX has a trailing 10-year return of 11.8%.
Janus Henderson Enterprise Fund Class T (JAENX)
For optimum diversification, you want to include companies of all sizes in your portfolio. Also, as mentioned above, smaller companies often have more room to grow than large ones, which can translate to better long-term performance. It can also translate to greater risk, however, as smaller companies are more likely to go under than big names. That said, JAENX may have found the sweet spot of not too small and not too large with its top-performing, mid-cap growth portfolio. The fund is in the top quartile of its peer group’s performance for the past five, 10 and 15 years, with a trailing 10-year return of 12.9%. Its portfolio is primarily tech-based, with a healthy dose of financial services and industrials, too. Morningstar gives it five stars.
Vanguard Small-Cap Growth Index Fund (VSGAX)
Small-cap companies are those with market capitalizations of about $300 million to $2 billion. VSGAX has a low expense ratio of 0.07% and tracks the CRSP U.S. Small Cap Growth Index. This index features the faster-growing half of the broad small-cap market. VSGAX’s 10-year trailing return is 9.3%. Small-cap index funds such as VSGAX tend to have more of the technology stocks that trade on the Nasdaq. Remember that smaller companies come with greater risk, so take care to allocate assets to large-cap and small-cap index funds in ways that match your risk tolerance.
American Funds New Perspective Fund Class A (ANWPX)
An important risk to watch out for in your 401(k) is home country bias. This happens when you invest only or predominantly in companies based in your home country. While U.S. funds may feel comfortable because of their familiarity, if the economy falls into a recession, you’ll be glad to have some foreign investments to buffer your returns. One fund that lets you add an international flair to your portfolio is ANWPX. This fund takes a unique approach by trying to capitalize on the investment opportunities generated by changes in international trading patterns and economic and political relationships. It targets growth companies from around the world. It’s a strategy that has paid off over the past 15 years as the fund has sat in the top quartile of its peer group performance nearly every year. The trailing 10-year return is 10% with a portfolio that is less than 54% U.S.-domiciled.
BlackRock High Yield Bond Fund Portfolio (BRHYX)
A 401(k) wouldn’t be fully diversified without some bond exposure. The trick to bond funds is recognizing that they aren’t in your portfolio to generate long-term growth, but rather to help smooth the ride and give you somewhere to shift your assets during bear markets when stocks are down. As you near retirement, you’ll want to increase your bond holdings to help preserve the capital you’ve grown over the years. BRHYX is a riskier bond fund because it targets high yield bonds, also called “junk” debt because of its lower credit rating. This makes it a better fit for investors with 10 or more years until retirement and for this list of top performing 401(k) funds. This BlackRock fund also includes bank loans and investment-grade corporate bonds to manage the risk. It’s a top performer in its peer group over the past 10 years with a return of 4.4% compared to the category average of 3.3%. Morningstar gives it four stars.
American Funds American Balanced Fund A (RLBFX)
Balanced funds like RLBFX are another popular choice for 401(k) plans. In a balanced fund, the manager aims to maintain a set percentage allocation to equities and bonds. In the case of RLBFX, that equity allocation is 50% to 70%. The fund currently hovers closer to the 50% range, which may suggest management is taking a defensive position. With 194 stocks and more than 1,500 bonds, there’s plenty of room for the managers to maneuver. RLBFX has been a top-quartile performer in its category every year for the past 15 years. Its 10-year trailing return is 8.6%, which may not sound impressive next to the equity funds on the list, but remember this fund aims to find a balance between capital appreciation and preservation. Morningstar gives it five stars.
BlackRock Health Sciences Opportunities Portfolio (SHSSX)
If you’re willing to take more concentrated bets and are prepared to closely monitor your portfolio, you may be interested in industry-specific funds such as BlackRock’s Health Sciences Opportunities fund. The fund invests at least 80% of its assets in companies in health sciences and related industries, both within and outside the U.S. This can pay off well when the health industry is thriving but can make for a bumpy ride if things go south. With a 15.4% trailing 10-year return, things have been looking up for SHSSX. Just be sure to pair this fund with other, more diversified options. SHSSX should not be the only fund in your 401(k), or even the primary fund. It gets five stars from Morningstar.
Here are 10 of the best 401(k) funds:
— Fidelity Advisor Growth Opportunities Fund (FAGAX)
— JPMorgan Large Cap Growth A (OLGAX)
— Fidelity 500 Index Fund (FXAIX)
— T. Rowe Price Blue Chip Growth Fund (TRBCX)
— Janus Henderson Enterprise Fund Class T (JAENX)
— Vanguard Small-Cap Growth Index Fund (VSGAX)
— American Funds New Perspective Fund Class A (ANWPX)
— BlackRock High Yield Bond Fund Portfolio (BRHYX)
— American Funds American Balanced Fund A (RLBFX)
— BlackRock Health Sciences Opportunities Portfolio (SHSSX)
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Update 12/28/22: This story was previously published at an earlier date and has been updated with new information.