Choosing funds for a 401(k) shouldn’t feel like spinning the roulette wheel, but many investors may as well be relying on blind luck. When making decisions in this do-it-yourself process, it’s easy to gravitate toward funds that performed well in some recent time frame, such as one year or five years.
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Instead, building a portfolio around diversification gives investors protection against fluctuations in various corners of the market. Different asset classes take turns leading the market, and the top performers in one year often fall to the bottom the next.
The investor who chose a domestic growth fund at the beginning of 2021, based on recent performance, was sorely disappointed as that asset class took a beating in 2022, for example. Chasing returns is not the ideal way to select retirement investments.
Advantages of Low-Cost Index Funds
“When evaluating 401(k) options, the most consistently valuable choices are the low-cost, broad-market index funds that keep things simple, predictable and easy to understand,” says Zach Novak, a certified financial planner at Novak Financial Partners in Carbondale, Illinois.
Initial criteria should include low fees, broad diversification and investment options that are straightforward enough to stick with over time, he adds.
“In general, passive investing works because it keeps fees low, avoids unnecessary complexity and helps investors capture broad market returns efficiently,” Novak says. “Fees are also one of the few factors we can directly control, and decades of research show they are among the strongest predictors of long-term investment performance.”
Here are some popular choices in 401(k) plans, with a look at how they may fit into a diversified portfolio:
| Fund | Expense ratio | 10-year annualized return |
| Fidelity 500 Index Fund (ticker: FXAIX) | 0.015% | 14.6% |
| American Funds Growth Fund of America (AGTHX) | 0.59% | 14.5% |
| Fidelity Contrafund (FCNTX) | 0.63% | 16.6% |
| Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) | 0.05% | 10.0% |
| Fidelity Small Cap Index Fund (FSSNX) | 0.025% | 9.5% |
| American Funds Smallcap World (SMCWX) | 1.04% | 8.0% |
| Vanguard Total International Stock Index Admiral Shares (VTIAX) | 0.09% | 7.8% |
| American Funds EUPAC Fund (AEPGX) | 0.83% | 7.0% |
| Fidelity Emerging Markets Index Fund (FPADX) | 0.075% | 7.5% |
Fidelity 500 Index Fund (FXAIX)
This fund tracks the S&P 500 index and boasts a low expense ratio of just 0.015%. It has about $737 billion in assets under management, underscoring its popularity.
S&P 500 index funds are a staple of many U.S. investors’ retirement accounts.
“The Fidelity 500 Index can be a strong core holding, as it provides broad exposure to the U.S. economy, while maintaining low fees,” says Michelle Wagner, a certified financial planner (CFP) and founder of Wellful Money in Cary, North Carolina.
Maintaining a holding in this or another stock fund can help generate growth and outpace inflation.
“Even in retirement, exposure to equities can help support withdrawals and hedge against rising health care costs,” Wagner says.
American Funds Growth Fund of America (AGTHX)
Investors often associate mutual funds with active management, a classification that applies to this product.
According to American Funds, this vehicle offers “a flexible approach to growth investing.” It invests in traditional growth stocks as well as cyclical companies and turnaround situations with what managers deem significant growth potential.
Keep in mind: Active fund holdings can frequently overlap with indexes. In this case, top holdings including Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), Broadcom Inc. (AVGO), Alphabet Inc. (GOOG, GOOGL), Tesla Inc. (TSLA), Eli Lilly and Co. (LLY) and Netflix Inc. (NFLX) are all significant positions within the S&P 500.
Active management doesn’t always outpace index investing, but this fund has posted better returns than FXAIX on a three-year and one-year basis.
Fidelity Contrafund (FCNTX)
This large-cap domestic fund has a greater growth tilt than the S&P 500. Fund managers have latitude to invest in both value and growth equities.
For the most part, this fund’s top holdings parallel heavily weighted S&P 500 companies. However, Amphenol Corp. (APH), an electronics parts maker with a market capitalization of $170 billion, is a top 10 holding, whereas it’s only the 65th largest S&P 500 component.
This fund’s movements are highly correlated with the S&P 500, although the added growth emphasis has helped it outperform the S&P in recent years.
The expense ratio is 0.63%, which is reasonable for an actively managed large-cap growth fund. That’s below many similar funds, partly due to its modest turnover.
Vanguard Small-Cap Index Fund Admiral Shares (VSMAX)
Throughout certain historical time frames, small companies delivered higher long-term returns than larger, more established firms.
However, that advantage, dubbed the “small-cap premium,” has been uneven and has weakened overall in recent decades.
Nonetheless, vehicles like the Vanguard Small-Cap Index Fund Admiral Shares can still play a role in diversification, although investors shouldn’t lean on small-caps as a guarantee of extra performance in every market cycle.
Like other Vanguard funds, VSMAX has a low expense ratio, at just 0.05%. It tracks the CRSP US Small Cap Index, consisting of small domestic companies.
Fidelity Small Cap Index Fund (FSSNX)
Fidelity’s small-cap fund is another passively managed product. It measures performance of the Russell 2000 Index.
For investors interested in accessing this index outside of a 401(k), Vanguard and iShares offer exchange-traded funds (ETFs), the Vanguard Russell 2000 ETF (VTWO) and iShares Russell 2000 ETF (IWM).
“The FSSNX fund replicates the Russell 2000 with an efficient 0.025% expense ratio, giving investors who traditionally favor large-cap equities an opportunity for diversification,” says Justin Pullaro, a CFP and founder of Moving Worth Forward in Tampa, Florida.
“Investors should be cautious, though, as smaller companies can experience more pronounced swings in volatility than large-cap peers, but can provide a different kind of performance for those willing to hold over a longer time horizon,” he adds.
[READ: 6 Best Small-Cap Growth Stocks to Buy Now]
American Funds Smallcap World (SMCWX)
As the name suggests, this actively managed small-cap fund is composed of stocks from around the globe. The geographic breakdown is:
— U.S.: 48.8%
— Europe: 20.1%
— Asia and Pacific Basin: 20.3%
— Other (including Canada and Latin America): 8%
Typically, actively managed funds have a higher expense ratio than index funds; here, that fee clocks in at 1.04%. The fund normally invests in companies whose market capitalizations fall within the range of the MSCI All Country World Small Cap Index or the Russell 2000 Index.
Vanguard Total International Stock Index Admiral Shares (VTIAX)
This mutual fund measures performance of the FTSE Global All Cap ex US Index, a free-float-adjusted, market cap-weighted index that includes companies in developed and emerging markets outside the U.S.
The free-float-adjusted component of its strategy simply means it only counts shares actually available for the public to trade. This approach can prevent a country or even a single stock from being artificially overweighted and can also reduce tracking error.
Investors may benefit from this international exposure, says Patrick Ritter, a CFP at Core Planning near St. Louis.
“I often hear the sentiment that the S&P 500 or a U.S. total market fund is all you need,” he says. He notes that the FXAIX S&P 500 fund has returned about 50% more than international funds in the past decade, and that outperformance is likely to end at some point.
“We are only about 50% of the global stock market. While being invested 100% U.S. has been fortunate in the past 10 years, it’s anyone’s guess if or when this reverses, but it sure did in the 2000s,” Ritter adds. “This is home-country bias.”
American Funds EUPAC Fund (AEPGX)
This fund offers another way investors can sidestep the inclination toward investing most heavily in their home country. According to American Funds, it holds stocks of companies from developed and emerging markets that are positioned to benefit from innovation, global economic growth, increasing consumer demand or a turnaround in business conditions.
Derrick Alexander, founder of Greater Works Wealth in Tulsa, Oklahoma, says this fund has outperformed relative to market benchmarks. It’s pegged to the MSCI All Country World ex-USA Index. Top regions represented are Europe and the Middle East, emerging markets excluding China, and Japan.
“Though I’m generally not a fan of actively traded mutual funds because of their higher costs, I do believe active management can be valuable when it helps mitigate risk,” Alexander says. “While consistently beating the market is rare, depending on an investor’s stage of life, it can make sense to prioritize preservation over growth when risk capacity is lower.”
Alexander adds that he likes holding this position as long as he can purchase it no-load and at the lowest possible expense ratio. That ratio is currently 0.83%.
Fidelity Emerging Markets Index Fund (FPADX)
Risk and return are related, and perhaps nowhere in the realm of equity investing is that more true than with emerging-market stocks.
These markets are more volatile than developed markets, meaning they can fall sharply and rapidly in response to adverse regulatory, political, market or economic developments. They’re also sensitive to interest rate and currency exchange-rate risks.
However, it’s not unusual to see emerging-market equities outperform non-U.S. developed-market stocks during certain time frames, so they can play a role as diversifiers.
The Fidelity Emerging Markets Index Fund has an expense ratio of 0.075%, on the low side for its category. It tracks the market cap-weighted MSCI Emerging Markets Index, made up of large- and mid-cap companies in 24 emerging markets.
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9 of the Best-Performing 401(k) Funds originally appeared on usnews.com
Update 11/20/25: This story was previously published at an earlier date and has been updated with new information.
