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.
Best 401(k) investments of 2023
Compare the best 401(k) investments
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.
- AUM. All the funds selected have at least $1 billion in assets under management. A higher AUM indicates 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.