The Best Funds for Your 401(k) - Most popular funds in retirement plans range from decent to excellent. But we found a few slackers.
Consider these scenarios: Say you socked away $10,000 a year in your 401(k) from 2003 through 2012. To simplify things, we'll assume you made a lump-sum contribution at the start of each calendar year. If you had put all your money into Growth Company, your retirement account would be worth almost $167,000 today. If you had invested it in Magellan, your balance would be just over $118,000.
Given this big discrepancy, we decided to determine which of the most popular funds found in 401(k) plans stand above the rest. We asked BrightScope, a retirement-program data collector that ranks 401(k) plans, for a list of the 100 mutual funds with the most assets in 401(k) plans and other defined-contribution programs, such as 403(b) plans. Although the top 100 names represent a tiny fraction of the roughly 16,000 investment options in the 401(k) universe, the assets they hold account for 25% of all retirement-plan money.
The good news is that the list of the top 100 funds contains few duds. Their performance is usually either good or average. Plus, most charge below-average fees — probably because many are offered by the top three no-load families: Fidelity, T. Rowe Price and Vanguard
Taking the oldest share class of each fund, we clustered the top 100 into six broad categories: large-company stock funds, small- and midsize-company stock funds, foreign and global stock funds, balanced funds, bond funds, and target-date funds. Then we analyzed each fund's long-term track record, looking not just at raw results but at each fund's volatility and its performance in difficult markets. We also considered manager tenure and fees, among other things. A summary of the best — and in some cases, the laggards — in each category appears below. (Funds in boldface are those we recommend. The symbols are for the share classes we analyzed and may differ from the classes offered in your 401(k) plan. All returns are through January 31.)
The top-100 list contains many fine funds in this category. Among the best: Fidelity Contrafund (symbol FCNTX), a member of the Kiplinger 25. Its seasoned skipper, Will Danoff, has outpaced the market over the long haul — and has done so with below-average volatility. At Fidelity Growth Company (FDGRX), manager Steve Wymer has a knack for buying good, growing companies early and holding on. He bought Regeneron, now his fund's fourth biggest holding, in 2002 when it was a small biotech company, and it's now seemingly on every growth manager's buy list. Washington Mutual Investors (AWSHX) has a strict focus on dividend payers that adds stability. Dodge & Cox Stock (DODGX), another Kip 25 fund, is a streaky value fund. Its nine managers stick with their bargain-hunting strategy even when it's out of favor. The result is a fine long-term record. Finally, several index funds stand out, including three from Vanguard: Total Stock Market Index (VTSMX), 500 Index (VFINX) and Institutional Index (VINIX). The latter two track the S&P 500, but Institutional is cheaper, with an annual expense ratio of just 0.04%. Schwab 500 Index (SWPPX) is also a bargain, with annual fees of 0.09%. The biggest disappointment in this category has been Fidelity Magellan (FMAGX). Performance isn't everything, but it's hard to ignore Magellan's miserable numbers. Once Fidelity's flagship, Magellan scores rock bottom over three, five, ten and 15 years among the 32 large-company funds on the list.
Small, midsize company
Only 16 funds in this category ranked among the top 100 funds. You're lucky if Allianz NFJ Small-Cap Value (PSVIX), Artisan Mid Cap (ARTMX) and T. Rowe Price Mid-Cap Growth (RPMGX) are in your 401(k) plan — these fine funds are otherwise closed to new investors. The Allianz fund has turned in above-average returns with below-average risk by focusing on undervalued dividend-paying companies with market capitalizations between $100 million and $3.5 billion. Artisan Mid Cap focuses on midsize firms with strong balance sheets and sturdy growth prospects that trade at discount prices; the expected long-term earnings growth rate of its holdings is, on average, 21% a year. And the Price fund, run since its 1992 launch by Brian Berghuis, has won with a contrarian, low-turnover approach to growth investing. But this crop has a slew of other winners. Fidelity Low-Priced Stock (FLPSX), a member of the Kiplinger 25, has $36.9 billion in assets, making it the biggest fund in the group. Even so, the average market cap of its holdings is $3.9 billion, well below the $6.5 billion average size of holdings in the typical midsize-company fund. Two other Price funds prominent in retirement plans deserve praise: Small-Cap Stock (OTCFX) and New Horizons (PRNHX). Fidelity Mid-Cap Stock (FMCSX) has been one of the less-scintillating funds in this group, matching its peers over the past ten years but trailing its index benchmark. A new manager arrived in 2011, adding an element of uncertainty.
These funds' portfolios automatically reset their mix of stocks, bonds and cash over time, becoming less risky as they approach their target date. According to BrightScope, Fidelity, T. Rowe Price and Vanguard control 75% of all target-date assets, which explains why their funds dominate the 401(k) list. The Vanguard and Price funds regularly rank among the top 20% of their peer groups over the long haul. Vanguard's target funds typically hold Vanguard index funds, including Total Stock Market and Total Bond. Price leverages many of its best funds, including New Horizons, in its target funds. Fidelity Freedom funds have lagged their Vanguard and Price counterparts — and in most cases, they have been more volatile, too. Many of the Freedom funds are still suffering the legacy of poor results during the 2008 plunge. One reason: lousy performance in the underlying funds. Take Freedom 2040 (FFFFX), which sank 39% in 2008. Its top two holdings that year — Fidelity Disciplined Equity and Fidelity Equity-Income — lost more than 40% each. Fidelity has since retooled the Freedom funds and created a special group of Series funds to fill them, alongside other Fidelity funds. Star managers Will Danoff, of Contrafund, and Joel Tillinghast, of Low-Priced Stock, run two such Series funds. But because the mandates for the Series portfolios differ from those of their existing funds, we want to see how the managers perform with the new products. And we're taking a wait-and-see approach toward the Freedom funds as well.
Only six bond funds made the top 100. Two are index funds: Fidelity Spartan U.S. Bond Index (FBIDX) and Vanguard Total Bond Market Index (VBMFX). Two more are designed to protect investors against the effects of rising inflation: Vanguard Inflation-Protected Securities Fund (VIPSX) and Pimco Real Return (PRTNX). The remaining two, Pimco Total Return (PTTRX) and Dodge & Cox Income (DODIX), are medium-maturity bond funds. In years past, we might have recommended a broad-based bond index fund. But with bond yields near all-time lows, these Treasury-heavy portfolios are susceptible to rising interest rates (rates and bond prices usually move in opposite directions). At last report, the Fidelity and Vanguard index funds had 37% and 44% of their assets, respectively, invested in Treasuries. Meanwhile, Vanguard Inflation-Protected Securities and Pimco Real Return had the majority of their assets in, not surprisingly, Treasury inflation-protected securities. The Vanguard and Pimco funds do a fine job of achieving their goals, but this is not a great time to invest in them. TIPS are expensive (most sport negative yields, meaning TIPS holders receive less than a full inflation adjustment), and the funds are likely to lose value if interest rates rise. You're better off holding funds with low exposure to Treasuries and proven managers who have the flexibility to navigate the bond market's potentially treacherous waters. Pimco Total Return and Dodge & Cox Income fit the bill.
Most of the ten balanced funds among the top 100 are solid choices. Two such funds, Vanguard Wellington (VWELX) and Vanguard Wellesley Income (VWINX), are nearly mirror images of one another. Wellington has about two-thirds of its assets in stocks and the rest in bonds (a typical allocation for the balanced genre), and Wellesley has about one-third in stocks and the rest in bonds. The funds do a good job of controlling risk. Wellington and Wellesley lost 22.3% and 9.8%, respectively, in 2008; the average balanced fund sank 27.0%. Fidelity Balanced (FBALX) and Fidelity Puritan (FPURX) saw bigger drops in 2008, but they stand out because they do well in strong markets. Indeed, they roughly matched the stock market's bountiful returns over 2009 and 2010, for instance. American Balanced (ABALX), sponsored by the American Funds, boasts a three-year annualized return of 12.0%, the highest of the bunch. Its above-average exposure to stocks — about 70% of assets — may be one reason. Vanguard Balanced Index (VBINX) holds about 60% of assets in stocks and 40% in bonds. We're not so keen, though, on Vanguard's LifeStrategy Conservative Growth (VSCGX) and LifeStrategy Moderate Growth (VSMGX) funds: In 2011, the firm revamped this series of funds, which hold a mix of bonds and stocks that are tailored to different levels of risk tolerance. Over time, the changes may help boost the so-so returns of these funds, but the results remain to be seen.
Foreign and global stock
One theme was clear in this category: Funds with seasoned managers who tend to buy and hold with a long-term view stood above the rest. This group includes New Perspective (ANWPX), a team-run global fund from the American Funds family. It has some 40% of its assets in U.S. stocks and the rest in foreign issues. Also in the top 100 are Dodge & Cox International Stock (DODFX) and Harbor International (HAINX), both members of the Kiplinger 25. BlackRock Global Allocation (MDLOX) is a go-anywhere, multi-asset fund that holds stocks (both foreign and domestic), bonds, cash and even a smattering of precious metals. Global Allocation's ten-year annualized return of 10.4% edged out the MSCI EAFE index (a measure of foreign stocks in developed markets), and the fund did so with less risk than the index. The only emerging-markets fund to appear in the top 100 is Oppenheimer Developing Markets (ODMAX). It's a worthy choice: The fund outpaced the MSCI Emerging Markets index in each of the past five calendar years. If you prefer an unmanaged approach, try Vanguard Total International Stock Index (VGTSX) and Fidelity Spartan International Index (FSIIX). They charge low fees and mirror their benchmarks well. Finally, a word about Fidelity Diversified International (FDIVX). The fund isn't horrible — its 9.4% annualized return over the past ten years trails the EAFE index, but only slightly. Over the past five years, it trailed both the index and its average peer.