7 best performing funds for your 401(k)

The best funds for a 401(k) account incorporate diverse market sectors and reasonable fees.

  • By Barbara Friedberg,
  • U.S. News & World Report
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A 401(k) might be the best retirement wealth building tool ever created. The account reduces taxes in the year the contribution is made and every year thereafter, until the funds are gradually withdrawn during retirement. Couple the ongoing tax savings with the best 401(k) funds, and average investors can find a path to financial security. The company's 401(k) provider determines the available funds. So if one of the best performing funds isn't included in your plan, find a comparable substitute. Here are seven 401(k) funds from a variety of investment firms.

Invesco QQQ Trust (QQQ)

"In the large-cap space, where it is often quite difficult to find active managers that continually outperform the S&P 500 (.SPX), we like index funds that replicate the Nasdaq 100 index," says Rob Reilly, chief investment officer of Sandy Cove Advisors in Boston. The fund concentrates on big-name technology firms like Apple (AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN), Alphabet (GOOG, GOOGL), Facebook (FB) and Intel Corp. (INTC), which make up more than 46% of the portfolio. Reilly expects technology shares to continue growing. A $10,000 investment in QQQ on Dec. 31, 2008 would now be worth about $65,000, placing this fund in the top 1% of Morningstar's large growth category for the past five and 10 years.

JPMorgan SmartRetirement Funds

Most 401(k) plans offer a target date fund. These umbrella funds include stock and bond funds and transition to a conservative asset allocation as retirement nears. This glide path helps retirees guard against a market crash as the asset withdrawal stage approaches. Doug Steele, head of investment strategy at MassMutual Funds recommends RetireSMART by JP Morgan Target Date Funds, a top performer in this category. The JPMorgan SmartRetirement 2045 Fund (JSAAX), designed for those who seek to retire in 2045, received a gold ranking by Morningstar. In the same category, U.S. News ranks the Vanguard Target Retirement Income (VTINX) as No. 1 among target-date retirement funds.

Vanguard 500 Index Fund (VFINX)

Investors can't miss with this S&P 500 index fund. "I think the best fund for an investor's 401(k) is the simplest fund, an S&P 500 index fund," says Robert Johnson, professor of finance at Creighton University. Johnson's recommendation concurs with Warren Buffett. The investing billionaire instructed the trustee of his estate to invest 90% of his wife's inheritance in VFINX. Offered by scores of fund providers, including the John Hancock Variable Insurance Trust 500 (JFIVX), it's likely that most 401(k) accounts offer an S&P 500 fund. A proxy for the U.S. stock market, VFINX offers a 1.86% yield and 0.14% expense ratio. During the past 10 years, the fund enjoyed a 15.77% annual return.

iShares CMBS ETF (CMBS)

CMBS tracks the investment results of the Bloomberg Barclays U.S. investment-grade commercial mortgage-backed securities. These investments are pools of commercial mortgages. This is a niche within the broader bond fund category. As interest rates rise, investors can expect that higher yields will follow. The majority of the top 10 loans are issued by the Federal Home Loan Mortgage Corporation, known as Freddie Mac. The fund's five-year return is 2.54% and current yield is 3.23%. The fund's one-year return of 5.21% and low expense ratio of 0.25%, underscores this exchange-traded fund's position on this best performing 401(k) funds list.

Vanguard Intermediate-Term Corporate Bond ETF (VCIT)

This broadly based corporate bond fund, issued by low-price leader Vanguard, tracks a market-weighted index of investment-grade corporate bonds with five- to 10-year maturities. This bond fund is more broadly focused than the previous CMBS, mortgage-backed offer. VCIT also boasts one of the highest yields in its class, 3.82% yield to maturity. The fund sports a rock-bottom 0.07% expense ratio. Eighty percent of the bonds are issued in the U.S., with 6% in the U.K. and roughly 2% or less in other developed nations, such as Canada or Japan. A $10,000 investment in VCIT at inception, on Nov. 19, 2009 would be worth $16,688 today. That equates to a 5.35% annual return, which is in line with historical bond investment returns.

TIAA-CREF Real Estate Securities Fund (TIREX)

Even investors who own their own homes might consider adding a real estate investment fund to their 401(k). This important asset class adds a stable income stream to a diversified retirement account. When stock markets falter, real estate investments can inject stability into a portfolio. TIAA is a popular 401(k) provider and invests predominantly in U.S. real estate and up to 15% in foreign real estate. The fund owns impressive annual five- and 10-year average returns respectively at 10.37% and 18.76%, handily beating its category averages. The Fidelity Real Estate Investment Portfolio (FRESX) is an alternative with five- and 10-year average returns respectively at 9.48% and 19.5%, surpassing category averages, too.

American Funds Washington Mutual Fund (AWSHX)

"A good 401(k) fund has an investment strategy that is both consistent and dynamic," says Brian Koble, chief investment officer at Hefren-Tillotson in Pittsburgh. For that reason, he recommends AWSHX. It's a conservative fund that invests in quality dividend-paying stocks along with technology equities, making it somewhat unique in its large-cap blend niche. Since its inception in 1952, AWSHX earned an average annual return of 11.71%. But the 5.75% load or commission and 0.57% expense ratio suggests that a large-cap blend fund with lower fees might be preferable. The Fidelity Total Market Index Fund (FFSMX) beat the category average by 1.42% and earned a 15.4% average annual 10-year return.

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