The Best Vanguard Funds for 401(k) Retirement Savers
Vanguard funds account for a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its target-date solutions.
Vanguard funds are the most beloved offerings in 401(k) plans, and it's not even close. Thirty-three of its funds rank among the 100 most popular funds in employer-sponsored retirement plans in the country, according to information from BrightScope, a financial data firm that rates 401(k) plans.
Many of the best Vanguard funds make this list, but here's what the full breakdown of options looks like:
- 14 are low-cost index funds that track a broad market benchmark (more on those later).
- 10 are Vanguard Target Retirement funds, those one-stop funds for investors who want and need help investing their retirement savings.
- 9 are actively managed funds, including some of the most iconic offerings in Vanguard's arsenal.
As part of our annual review of the most popular 401(k) funds in the country, we're reviewing both Vanguard's actively managed and target-date funds. We have rated each fund Buy, Sell or Hold, and this year includes some upgrades and even a rare downgrade.
But first, a quick word about Vanguard's index funds. These types of low-cost investments are built to perform in line with a broad index. And Vanguard's "Total" fund suite – Total Stock Market (VTSMX), Total International Stock (VTIAX) and Total Bond Market (VBTLX) – are among the biggest index funds in the country. Generally, these funds do what they're geared to do, and we recommend them fully.
But two index funds on the list require a word of caution, namely Vanguard Growth Index (VIGAX, #48 in the ranking) and Vanguard Value Index (VVIAX, #68). These funds slice the universe of U.S. companies a little finer than Vanguard 500 Index, which holds the 500-odd stocks in the S&P 500-stock index. There's nothing wrong with concentrating on growth or value stocks. But it's worth remembering that these funds can be more volatile than the broad stock market at times, and perform differently (sometimes better, sometimes not) than the broad market, too.
Now, let's look at some of the best Vanguard funds for your 401(k) plan … and weed out a few lesser options, too.
Returns and data are as of Sept. 25, unless otherwise noted, and are gathered for the share class with the lowest required minimum initial investment – typically the investor share class or A share class. The share class available in your 401(k) plan may be different.
Vanguard Equity-Income: BUY
- Symbol: VEIPX
- Expense ratio: 0.27%
- One-year return: -4.2%
- Three-year annualized return: 4.2%
- Five-year annualized return: 9.1%
- 10-year annualized return: 11.1%
- Rank among the top 401(k) funds: #55
- Best for: Investors seeking a smoother ride in a stock fund
For more than a decade, Vanguard Equity-Income has delivered above-average returns with below-average risk. That's in part by design. VEIPX is intended to provide current income and does so – it currently yields 2.9% – by investing in companies that consistently pay dividends. Johnson & Johnson (JNJ), Cisco Systems (CSCO) and JPMorgan Chase (JPM) are among the fund's top holdings.
Smart stock picking by steady hands has helped, too. Michael Reckmeyer, of subadviser Wellington Management, manages two-thirds of the fund's assets, focusing on firms that can sustain their dividend or raise it over time. Jim Stetler and Binbin Guo, of Vanguard's in-house quantitative stock-picking group, run the rest using sophisticated computer models to ferret out stocks that meet four characteristics, including consistent earnings growth and relatively low prices.
VEIPX has been one of the best Vanguard funds investors could want in a 401(k) account for years. Over the past decade, it has delivered an annualized return of 11.1%, better than 94% of its peers – funds that invest in large-company stocks trading at a discount, with considerably less volatility, too.
Vanguard Equity-Income also is a member of the Kiplinger 25, the list of our favorite no-load, actively managed mutual funds.
Vanguard Explorer: BUY
- Symbol: VEXPX
- Expense ratio: 0.45%
- One-year return: 9.6%
- Three-year annualized return: 12.0%
- Five-year annualized return: 12.6%
- 10-year annualized return: 12.9%
- Rank among the top 401(k) funds: #80
- Best for: Retirement savers looking to diversify their U.S. stock holdings with small and midsize companies
In recent years, Vanguard Explorer has turned in a better-than-average performance. In fact, in each of the past three full calendar years – 2017 to 2019 – this small- and midsize-company stock fund has outpaced the small-company index, Russell 2000; the midsize company benchmark, Russell Midcap; and the typical fund in its Morningstar peer group, which invests in small, growing firms.
The sustained turnaround is one reason we upgraded VEXPX's rating to a Buy after several years of assigning it a Hold.
That said, a few things about the fund still trouble us. Size is one. Explorer, with $17 billion in assets, is the biggest actively managed small-company stock fund in the country. Too much money can hamper returns, especially for funds that focus on small- and mid-cap stocks. When such a fund tries to make trades in shares that typically see little activity, they may move share prices – up when buying, down when selling – in ways that can hurt results.
Asset bloat is to blame in part for another concern, too: the number of subadviser changes at the fund. Vanguard's solution for outsize assets is to carve up and dole out pieces of the fund to different advisory firms. But if the mix of firms produces ho-hum results, Vanguard swaps out one subadviser for another. At Explorer, Vanguard has made 14 such partial manager changes over the past decade. Stock pickers from Wellington Management run the biggest slice, 35%, of Explorer's assets. The remaining four subadvisers run 14% to 17% of assets.
Time will tell if this current arrangement brings strong results and warrants no changes, or if more manager shifts may be afoot. VEXPX had a tough time staying ahead of its peers over the first nine months of 2020, though it beat the Russell 2000. And over the past five years, its five-year annualized return, 12.6%, beat 56% of its peer group – funds that focus on fast-growing small-company stocks.
Vanguard Inflation-Protected Securities: BUY
- Symbol: VIPSX
- Expense ratio: 0.20%
- One-year return: 9.6%
- Three-year annualized return: 5.2%
- Five-year annualized return: 4.4%
- 10-year annualized return: 3.4%
- Rank among the top 401(k) funds: #70
- Best for: Nearly retired or retired investors who want to guard against inflation
Inflation is not an imminent worry, but expectations for it are rising. Indeed, over the near term, we have a moderate view on rising prices for goods and services. In 2020, Kiplinger expects 1.2% inflation – far below the 2.3% rate logged in 2019. But the Fed's easy-money policies mean high inflation is a likelihood in the future, say many market analysts.
Vanguard Inflation-Protected Securities, which is actively managed, invests in Treasury Inflation-Protected Securities (TIPS). These inflation-protected bonds act as an insurance policy against rising consumer prices. The securities pay a fixed coupon rate on top of the principal that is adjusted for inflation and come with the full faith and credit of the U.S. government. Like actual TIPS these days, VIPSX currently sports a negative yield, of -1.3%.
TIPS matter more for investors who are already retired than for those who are early in their careers. While a retiree might hold 10% of her assets in TIPS; those just beginning their working life might have none or no more than 1% of their assets in TIPS. For investors in the middle of the careers, an allotment of 2% to 5% is more than enough.
Vanguard International Growth: BUY
- Symbol: VWIGX
- Expense ratio: 0.43%
- One-year return: 44.9%
- Three-year annualized return: 15.3%
- Five-year annualized return: 17.9%
- 10-year annualized return: 10.6%
- Rank among the top 401(k) funds: #40
- Best for: Foreign stock exposure
Like other Vanguard funds with sizable assets, Vanguard International Growth experienced its own version of manager musical chairs in the early 2010s. But by mid-2016, the fund had slimmed its roster of three subadvisers to just two – Baillie Gifford and Schroders – and the lineup is proving to be a winning combination. Over the past three years, VWIGX's annualized return of 15.3% beats 96% of its peers and is well ahead of the 0.6% three-year average return in the MSCI ACWI ex USA Index, which tracks stocks outside the U.S. in emerging and developed countries.
The firms, both U.K.-based, have slightly different approaches. Baillie Gifford, which runs roughly 60% of the fund's assets, is willing to pay up for stocks with explosive growth; Schroder's ideal stock is underappreciated but growing fast.
Emerging-markets stocks make up nearly one-fourth of the portfolio, a smidge more than the MSCI ACWI ex USA Index. But some of those stocks – including Chinese shopping platform for domestic consumer products and services Meituan Dianping (MPNGY, up 137.7% over the past 12 months), Argentinian online auction and e-commerce company MercadoLibre (MELI, +103.6%) and TAL Education (TAL, +68.4%), a Beijing-based after-school education group – are among VWIGX's best performers over the past year.
Vanguard Primecap: HOLD
- Symbol: VPMCX
- Expense ratio: 0.38%
- One-year return: 11.8%
- Three-year annualized return: 11.2%
- Five-year annualized return: 14.5%
- 10-year annualized return: 14.4%
- Rank among the top 401(k) funds: #7
- Best for: Aggressive investors who can tolerate volatility and have long time horizons
Recent performance in Vanguard Primecap, which is closed to new investors outside of employer-sponsored retirement savings plans, has been disappointing. The fund's annualized return over the past three years and the past 12 months has lagged 88% of its peers.
The five managers have proven themselves capable stock pickers in the past. They pinpoint bargain-priced companies with long-term growth prospects that they think will kick the stock higher over the next three to five years. In some cases, their stock picks take time to play out. But over the long haul, their patience has paid off. Over the past 15 years, for instance, the fund's 10.9% annualized return beats 63% of its peers – funds that invest in large, growing companies. VPMCX beats the S&P 500, too, by an average of 1.8 percentage points per year over that period.
In 2020, the fund's positions in almost every major U.S. airline as well as some cruise lines "created an insurmountable headwind" as travel ceased with the pandemic, the managers said in a recent report (they make it a rule not to talk to the press). Financial stocks JPMorgan Chase, Discover Financial Services (DFS) and Wells Fargo (WFC) have been a drag, too.
No manager gets it right all of the time, of course, so we're not about to give up on Primecap because of a bad spell. But we have downgraded it from Buy to Hold.
Vanguard Wellesley Income: BUY
- Symbol: VWINX
- Expense ratio: 0.23%
- One-year return: 5.0%
- Three-year annualized return: 6.1%
- Five-year annualized return: 7.3%
- 10-year annualized return: 7.3%
- Rank among the top 401(k) funds: #95
- Best for: Conservative investors interested in owning more bonds than stocks in a single fund
Bonds take center stage in Vanguard Wellesley and make up roughly 60% of assets, while stocks play a supporting role with roughly 35% of assets. Cash and other assets round out the rest of the fund.
The same firm that manages some of Vanguard's best actively managed funds, Wellington Management, also runs this fine fund. Michael Stack and Loren Moran pick the bonds, focusing on A-rated corporate credits. Michael Reckmeyer, the whiz behind Vanguard Equity-Income, picks the stocks, finding high-quality, dividend-paying stocks with a yield higher than that of the S&P 500 at the time of purchase. (He's likely to sell if the yield falls below that average.)
Over the past three years – the period this team has been in place at Wellesley Income –VWINX's 6.1% annualized return beats 90% of its peers, which are funds that allocate roughly 40% to stocks.
Vanguard Wellington: BUY
- Symbol: VWELX
- Expense ratio: 0.25%
- One-year return: 6.2%
- Three-year annualized return: 7.8%
- Five-year annualized return: 9.6%
- 10-year annualized return: 9.4%
- Rank among the top 401(k) funds: #8
- Best for: Moderately conservative investors looking for a 60% stock/40% bond portfolio
For years, Vanguard Wellington, a member of the Kiplinger 25, has delivered to its investors. Over the past 15 years, for instance, the fund's 7.9% annualized return beats more than 90% of its peers – funds that invest roughly 60% of its portfolio in stocks and 40% in bonds.
VWELX's managers have changed, but we're not worried. The new-guard members are longtime Wellington veterans. Bond picker John Keogh left in 2019, but his colleagues Michael Stack and Loren Moran, who had been named co-managers in 2017, were already in place. Meanwhile, Daniel Pozen, who has been with Wellington since 2006, stepped in for stock picker Ed Bousa in June.
We'll be watching the new team closely in the coming months, as there might be small tweaks at the margin to the portfolio. But Wellington says Pozen will continue to focus on high-quality, dividend-paying companies with strong balance sheets and competitive advantages that can fuel dividend hikes over time. The bond managers, who have been running their side of the show since 2019, have crafted a portfolio of mostly A-rated U.S. corporate bonds and Treasuries.
Vanguard Windsor: SELL
- Symbol: VWNDX
- Expense ratio: 0.30%
- One-year return: -5.4%
- Three-year annualized return: 1.6%
- Five-year annualized return: 6.5%
- 10-year annualized return: 9.7%
- Rank among the top 401(k) funds: #96
- Best for: Investors in need of beefing up their exposure to bargain-priced stocks
Vanguard Windsor merged Capital Value with Windsor in mid-2020. Morningstar analyst Alec Lucas said the move shouldn't change anything at Windsor, since the two funds have a lot in common, including a manager. David Palmer of subadviser Wellington Management was running Capital Value, and he had responsibility for 70% Windsor. Pzena Investment Management, which has an investment style that tilts toward deep value stocks, runs the remaining 30% of Windsor assets.
But value investing has been in a funk for a decade, if not more, as growth stocks have powered the broad market forward. Funds that focus on bargain-priced, large-company stocks have returned 8.7% over the past decade annualized. The S&P 500, by contrast, has gained 13.5% annualized.
Windsor’s main problem is that value stocks – the fund’s preferred hunting ground – have lagged growthier fare for years. That’s explains in part why the fund has fallen short of the S&P 500 over the past decade. It’s worth noting that next to its peers – funds that invest in bargain-priced large-company stocks – Windsor has fared better in seven of the past 11 calendar years, going back to 2009. Still, an investment in an S&P 500 index fund would have been more rewarding over the past decade ... and less volatile, too.
Vanguard Windsor II: SELL
- Symbol: VWNFX
- Expense ratio: 0.34%
- One-year return: 3.8%
- Three-year annualized return: 6.2%
- Five-year annualized return: 9.2%
- 10-year annualized return: 10.6%
- Rank among the top 401(k) funds: #33
- Best for: Avoid this fund in favor of an U.S. stock index fund instead
Investors who had chosen an S&P 500 index fund (or other broad U.S. large-company stock index fund) over Vanguard Windsor II would have done better in seven of the past 11 full calendar years, as well as so far in 2020.
Put another way, a $10,000 investment in Windsor II a decade ago would be worth just over $27,000 today; a similar investment in Vanguard 500 Index (VFIAX) would be worth more than $34,000. That's largely why we rate this fund a Sell.
Vanguard has been shifting the subadviser lineup at this fund so much – the latest manager sweep came in late 2019 – that VWNFX now falls in Morningstar's large blend category (meaning, the fund invests in large companies with growth and with value characteristics) instead of large value, where it had been for years. That raises questions about how the new team, which includes a total of eight stock pickers from four advisory firms: Aristotle Capital Management, Hotchkis & Wiley Capital Management, Lazard Asset Management and Sanders Capital.
We'll watch closely and hope for the best.
Vanguard Target Retirement Target-Date Funds: BUY
- Rank among the top 401(k) funds: #66 (VTXVX, 2015); #19 (VTWNX, 2020); #11 (VTTVX, 2025); #12 (VTHRX, 2030); #17 (VTTHX, 2035); #22 (VFORX, 2040); #27 (VTIVX, 2045); #39 (VFIFX, 2050); #81 (VFFVX, 2055); #79 (VTINX, Retirement Income)
- Best for: Workers who want an expert handling the investment decisions and ongoing maintenance for their retirement savings
More than half of all savers in an employer-sponsored retirement plan are invested in a target-date fund, according to a 2019 Vanguard study. The Valley Forge, Pennsylvania-based company should know. It manages 38% of the $2.3 trillion assets in target-date funds – the biggest chunk among fund companies by far.
So it should come as no surprise that 10 Vanguard target-date funds – the portfolios with target years between 2015 and 2055, plus a retirement income fund – rank high among the most popular 401(k) funds in the country.
For the uninitiated, target-date funds hold stocks and bonds and are designed to help people invest appropriately for retirement. Experts make the investing decisions, rebalance the portfolio when needed and shift holdings to a more conservative mix as you age. The Target Retirement 2030 fund has 67% of assets in stocks, 31% in bonds and 2% in cash.
The simplicity of Vanguard's target-date funds is a draw. Each fund in the series holds just four to five index funds, but together, they cover the markets. Vanguard's Total Market index funds – Total Stock Market, Total International Stock Market, Total Bond Market and Total International Bond Market (VTABX) – comprise the key positions. An inflation-protected bond fund is added in nearer-dated funds for savers who are retired or are nearing retirement.
The funds are cheap, too: The Investor share class of Vanguard's retirement funds have expense ratios that range between 0.12% and 0.15%. And chances are your retirement savings plan holds a share class that's less expensive.
Some investors forget that these funds will rise and fall with the stock and bond markets and they sell when the going gets rough. That's a mistake. When the S&P 500-stock index fell 34% in early 2020, Vanguard Target Retirement 2055 (for savers with 35 years to go before they retire) sank 32%. That's expected, however, because the fund holds close to 88% of its assets in stocks. Investors who sold missed out on the rebalancing moves the managers made in the selloff's wake, taking profits in higher-priced fare to buy low-priced assets in order to keep target allocations intact.
If you invest in these funds, stay in for the long haul. Don't panic and sell when the market takes a hit, as it is wont to do.
Learn more about Vanguard's Target Retirement Funds at the provider site.
