Retirement may be close to a universal goal. If your definition of retirement isn’t to stop working, you can work as much as you want. The only way to achieve that goal is by having enough money that you aren’t dependent on a paycheck. The best savings vehicle is your employer-sponsored 401(k).
“The retirement runway can be long, especially for younger investors, so it’s important to begin saving early and often to take advantage of compounding returns,” says Sabino Vargas, senior financial advisor at Vanguard. He recommends saving 12% to 15% of your income, or at least enough to get your employer match. But how much you save is only the start. Next, you must decide which 401(k) investments to use.
Vargas says diversification and low-cost and high-quality investments that reflect your risk tolerance are key when you build a portfolio.
For our rankings of the best 401(k) investments, we screened retirement funds in six main categories — large-cap, mid-cap, small-cap, foreign, bond and target-date — to find the best in each group. Funds were evaluated based on fee levels and 10-year returns relative to category peers. You probably won’t find all these funds in your 401(k). But at least a few or similar alternatives will likely be available. Remember to weigh your options against your goals, risk tolerance and time horizon to find the best match for you.
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Best 401(k) investments of 2023
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Fidelity 500 Index (FXAIX)
: Best large-cap 401(k) investment
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Vanguard Mid-Cap Index Institutional (VMCIX)
: Best mid-cap 401(k) investment
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: Best small-cap 401(k) Investment
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TIAA-CREF International Equity Index Institutional (TCIEX)
: Best foreign 401(k) Investment
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PIMCO Income Institutional (PIMIX)
: Best bond 401(k) investment
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American Funds 2055 Target Date Retire R6 (RFKTX)
: Best target-date 401(k) investment
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Compare the best 401(k) investments
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Methodology
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Final verdict
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Frequently asked questions (FAQs)
Best 401(k) investments of 2023
Best large-cap 401(k) investment
Fidelity 500 Index (FXAIX)
Expense ratio
0.015%
Total assets
$447.4 billion
What you should know
FXAIX is a popular mutual fund inside and outside 401(k)s. It tracks the , a well-known index of 500 of the largest U.S. companies, including Apple Inc. (AAPL), Microsoft (MSFT) and Alphabet (GOOGL). More than 28% of the fund’s portfolio is in tech stocks, so make sure you pair it with funds that offer greater exposure to other sectors for balance.
With an expense ratio of only 0.015%, this fund is not only one of the best 401(k) investments but also one of the cheapest. A low portfolio turnover rate of 3% also helps keep costs low, as the fund will incur fewer trading expenses. This is important because even a slight increase in your investment expenses can greatly impact your long-term returns.
Pros and cons
Pros
- A low expense ratio of 0.015%.
- Includes many large technology stocks.
- Low portfolio turnover of 3%.
Cons
- Holds only large-cap stocks.
- More than a quarter of the portfolio is in tech stocks.
- No international exposure.
More details
- 10-year annualized return as of September 30: 11.90%.
Best mid-cap 401(k) investment
Vanguard Mid-Cap Index Institutional (VMCIX)
Expense ratio
0.04%
Total assets
$132.6 billion
What you should know
VMCIX tracks the CRSP U.S. Mid Cap Index, which targets companies representing 70% to 85% of U.S. market capitalization, although VMCIX’s portfolio does include a few foreign holdings. The portfolio holds over 340 stocks with a median market cap of $23.12 billion. Industrial stocks represent the largest share of the portfolio, but even this is only around 15%. Similarly, the largest holding accounts for less than 1% of the portfolio’s assets, indicating it is well diversified across these names.
VMCIX is categorized as an aggressive fund by Vanguard, meaning it is subject to wide share price fluctuations and may be suitable for people with investing horizons of 10 years or longer, according to the company.
Pros and cons
Pros
- A low expense ratio of 0.04%.
- Fairly well diversified across sectors.
- Large portfolio of more than 340 stocks.
Cons
- Minimal international exposure.
- No fixed-income exposure.
- Can be volatile.
More details
- 10-year annualized return as of September 30: 9.06%.
Best small-cap 401(k) Investment
Vanguard S&P Small-Cap 600 Index (VSMSX)
Expense ratio
0.08%
Total assets
$3.8 billion
What you should know
As the name implies, VSMSX tracks the S&P SmallCap 600, an index that measures the performance of 600 smaller U.S. companies. To be included in the index, a company must have a market cap between $750 million and $4.6 billion.
Small-cap stocks can be good 401(k) investments because of their superior growth potential. It’s easier to grow quickly when you’re small than when you’re the size of Apple. But small-cap stocks are also riskier than large-cap stocks because it’s easier to fall out of favor with investors or go out of business when you don’t have a big market share.
That’s one reason Vanguard classifies VSMSX as an aggressive fund, noting that while it offers high potential for investment growth, the share value may rise and fall more sharply. Thus, VSMSX is best for investors with investing horizons of at least 10 years.
Pros and cons
Pros
- High growth potential.
- Large portfolio of more than 600 stocks.
- A low expense ratio of 0.08%.
Cons
- Riskier investments are prone to wider price swings.
- No international exposure.
- No fixed-income exposure.
More details
- 10-year annualized return as of September 30: 8.13%.
Best foreign 401(k) Investment
TIAA-CREF International Equity Index Institutional (TCIEX)
Expense ratio
0.05%
Total assets
$22.0 billion
What you should know
TCIEX is a great option for adding international stocks to your 401(k) portfolio. It provides exposure to more than 800 stocks with a low expense ratio of 0.05%. It tracks the MSCI EAFE Index, which includes nearly 800 large- and mid-cap companies from 21 developed market countries.
Just over a fifth of the portfolio’s total assets are in Japan, followed by the U.K. and France. Financials represent the highest sector weight at more than 18%. TCIEX does a great job of staying diversified. Its largest holding, Nestle, accounts for about 2% of the portfolio.
Pros and cons
Pros
- Well-diversified across more than 800 foreign stocks.
- Holds stocks from 21 different countries.
- A low expense ratio of 0.05%.
Cons
- Little to no U.S. market exposure.
- No fixed-income exposure.
- High financial sector weighting at more than 18%.
More details
- 10-year annualized return as of September 30: 3.92%.
Best bond 401(k) investment
PIMCO Income Institutional (PIMIX)
Expense ratio
0.5%
Total assets
$125.5 billion
What you should know
PIMCO is known for being a leading fixed-income investment provider, so it’s no surprise that its income fund is among the best bond funds for 401(k) investors. PIMIX tracks the Bloomberg US Aggregate Index, which covers the entire U.S. fixed-rate bond market, including government and corporate bonds, mortgage pass-through securities, and asset-backed securities.
PIMIX holds over 7,000 bonds with an effective duration of just over three years. Duration measures how sensitive a bond or portfolio of bonds is to interest rate changes. A shorter duration means the portfolio is less sensitive to these changes and, thus, less likely to be volatile. PIMIX’s relatively short duration, coupled with nearly 40% of its assets being in government bonds, makes it a fairly stable bond investment. It could also appeal to retirees looking for income, as it pays a monthly dividend.
Pros and cons
Pros
- A diversified portfolio of more than 7,000 bonds.
- Relatively stable investment.
- Monthly dividends.
Cons
- Fixed-income investments can’t generate the growth of equity investments.
- The short duration may be too conservative for some investors.
- Holds significant weight in nonagency residential mortgages.
More details
- 10-year annualized return as of September 30: 4.00%.
Best target-date 401(k) investment
American Funds 2055 Target Date Retire R6 (RFKTX)
Expense ratio
0.38%
Total assets
$17.7 billion
What you should know
Before getting into RFKTX, it’s worth noting that the best target-date fund will vary by investor. In the case of RFKTX, that’s 2055. If you’re not planning to retire in or around that year, look for that version of this fund closer to your target retirement year.
We chose American Funds as the best target-date 401(k) investment option because of its strong quantitative research. More than 90% of the assets in the portfolio are Morningstar Medalist securities. RFKTX is a fund of funds, using a portfolio of actively managed mutual funds to create the desired mix of growth, income and capital preservation. As the target retirement year approaches, the fund increasingly focuses on income and capital conservation to help near-retirees manage risk. That makes it a great option for hands-off investors.
Pros and cons
Pros
- Based on strong quantitative research and investment selection.
- Manages risk as retirement nears.
- Great hands-off investment choice.
Cons
- It may be too aggressive or too conservative, depending on your preferences.
- Mostly large-cap stocks.
- May underperform other target-date funds due to a more conservative approach.
More details
- 10-year annualized return as of September 30: 8.35%.
Compare the best 401(k) investments
| Fund | Category | Expense ratio | Total assets |
|---|---|---|---|
| Fidelity 500 Index (FXAIX) | U.S. large-cap blend | 0.02% | $447.4 billion |
| Vanguard Mid Cap Index Institutional (VMCIX) | U.S. mid-cap blend | 0.04% | $132.6 billion |
| Vanguard S&P Small-Cap 600 Index (VSMSX) | U.S. small-cap blend | 0.08% | $3.8 billion |
| TIAA-CREF International Equity Index Institutional (TCIEX) | Foreign large blend | 0.05% | $22.0 billion |
| PIMCO Income Institutional (PIMIX) | Multisector bond | 0.5% | $125.5 billion |
| American Funds 2055 Target Date Retire R6 (RFKTX) | Target-date 2055 | 0.38% | $17.7 billion |
Methodology
Our curated rankings of the top Vanguard mutual funds were created by applying a screen of several “must-have” metrics:
Morningstar rating. All of the funds selected have at least a 4-star rating from Morningstar. This is a quantitative, rearward-looking measure of a fund’s historical performance.
Morningstar medal. All the funds selected also earn either a silver or gold medal from Morningstar, indicating the company’s analysts have high conviction that the strategy will outperform a relevant index or most of its peers over a market cycle.
Total assets. All the funds selected have at least $1 billion in assets under management. Higher assets indicate greater investor confidence and interest in a fund.
Expense ratios. All of the funds selected have an expense ratio of 0.51% or less to reduce the drag that fees have on long-term returns.
Why other funds didn’t make the cut
This list is by no means exhaustive. Many other great 401(k) funds offer similar benefits to those listed above. Each 401(k) plan offers select investment options, so the key is to sort through them to find the best fit for you.
To choose the best 401(k) investments, we ruled out funds with expense ratios above 0.51%. Research shows the impact fund fees can have on long-term returns.
That isn’t to say higher fees are always bad. Many actively managed funds charge higher fees to compensate for the higher levels of research and oversight that go into the fund’s portfolio management. But if you use a fund that charges a higher fee, ensure you are adequately rewarded for the cost through superior returns or downside protection.
We also chose to focus on broader funds rather than those specializing in a particular sector for ease of diversification. Sector funds can be great additions to a 401(k) portfolio, but you want to ensure you combine them with other funds to benefit from true diversification.
Final verdict
For the best 401(k) investment, we recommend a target-date fund. Target-date funds are designed to be an entire retirement portfolio in one. They adjust their allocation from aggressive to moderate to conservative as the target date approaches, just as an investor should adjust their portfolio, enabling retirement investors to set it and forget it after choosing the target-date fund closest to their retirement year.
If you’d like more control over the asset allocation of your 401(k) and are comfortable rebalancing regularly and adjusting that allocation over time, a more targeted fund, such as FXAIX, is a great pick, as it gives you low-cost exposure to some of the biggest names in the U.S. stock market. For better diversification, however, it’s best to pair this fund with an international offering such as TCIEX and a bond fund such as PIMIX.
If these funds are unavailable in your 401(k), you can build an equally solid portfolio by finding the closest substitutes. Just remember to keep fees low and ensure the fund has adequate assets under management so you can be confident in its long-term prospects.
Frequently asked questions (FAQs)
The best investments for a 401(k) will vary by individual. If you are just starting your career and have a lengthy time horizon before retirement, you may prefer a more aggressive stock fund that can provide strong long-term growth.
As you near retirement, however, you may want to shift to more conservative options, such as dividend stock funds or bond funds, which can provide more stability and protect your accumulated earnings. If you need help managing your 401(k) investments, a target-date fund for your retirement year is an easy and reliable choice.
Young adults who have many years until retirement should focus on more aggressive 401(k) investments, such as stock funds, as they can provide superior long-term growth.
You still have decades until retirement, so you can afford to ride out a market downturn, whereas near-retirees may not be able to afford such losses. If you’re a nervous investor anxious about drops in portfolio value, you may be better off with a more conservative investment approach, with more bond funds to reduce emotional distress.
Retirement planning and investments within a 401(k) are critical aspects of financial stability, and the details in that article certainly cover a broad spectrum of investment options. The insights provided emphasize the significance of early and consistent savings, recommending a 12% to 15% income allocation for optimal retirement preparedness.
Each investment mentioned aligns with different risk profiles and objectives. The Fidelity 500 Index, for instance, tracks the S&P 500, offering exposure to large-cap U.S. companies with a notably low expense ratio. Conversely, Vanguard Mid-Cap Index Institutional targets mid-sized companies with a slightly higher risk level due to market volatility.
Additionally, the Vanguard S&P Small-Cap 600 Index highlights the potential for growth and risks associated with smaller companies. International exposure is addressed through the TIAA-CREF International Equity Index, which diversifies across 21 developed market countries. Meanwhile, PIMCO Income Institutional focuses on bonds, providing stability but less growth potential than equity investments.
The article's mention of the American Funds 2055 Target Date Retire R6 underlines the suitability of target-date funds, automatically adjusting asset allocation based on the projected retirement year, a convenient option for hands-off investors.
The methodology section sheds light on the criteria used for ranking these investments, considering factors like Morningstar ratings, total assets, and expense ratios. This comprehensive approach ensures a well-rounded selection, aiming to cater to diverse investor needs and risk appetites.
The article smartly addresses FAQs, emphasizing the importance of aligning investment choices with one's risk tolerance, time horizon, and retirement goals. It aptly suggests a more aggressive approach for younger investors and a shift toward more conservative options closer to retirement to safeguard accumulated earnings.
In summary, this article provides a holistic view of 401(k) investment options, methodologies for selection, and insightful advice for investors at different stages of their careers and retirement planning.
