How good are the funds in your 401(k) plan? If the plan includes Fidelity Growth Company, the likely answer is, very good: The fund’s annualized return of 11.8% over the past ten years beat 97% of its peers among large-company growth stock funds. But Fidelity, a huge player on the 401(k) scene, has some stinkers, too. For instance, Fidelity Magellan, also a large-company growth fund, returned 5.1% annualized over the past decade, lagging 96% of similar funds. A gap like that can mean the difference between a comfortable retirement and one that’s delayed because of a savings shortfall.
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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 (see Best of the Big Fund Families).
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.