The Best Vanguard Funds for 401(k) Retirement Savers
Vanguard funds account for roughly a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its target-date solutions.
No other fund firm in the country has a bigger hand in retirement savings than Vanguard.
Among the 100 most widely held funds in 401(k) plans, roughly a third are Vanguard funds. So in this, our annual review of the biggest retirement savings plan, we take a closer look at some of Vanguard's most popular funds in 401(k) accounts, and rate them Buy, Hold or Sell.
Several are index funds, which we do not rate. It's not that we don't like them. We do. But decisions to buy an index fund generally hinge on whether you seek exposure to a certain part of the market. And for the most part, index funds fulfill their purpose – they track the indexes they mirror, less expenses.
But actively managed funds are different.
Some are better than others. Managers change, which can affect a fund's returns. Underperforming funds might be lagging for a good reason; say, its investment style is simply out of favor. That's why we analyze only the actively managed funds from Vanguard in this story. We also review the firm's two target-date series, Institutional Target Retirement and Target Retirement, which are among Vanguard's most popular 401(k) funds and are due to merge (more on that below). Both series hold mostly index funds, but active decisions are made on asset allocation.
This story – as well as our upcoming reviews of other big fund firms in the 401(k) world, including Fidelity, T. Rowe Price and American Funds – is meant to help savers make good choices among the funds available in their 401(k) plan.
Let's look at some of the best Vanguard funds for your 401(k) plan … and weed out a few lesser options, too. For simplicity's sake, and to make comparisons more even, where possible we cite data and returns for Vanguard's Investor share class, which is open to retail investors.
Returns and data are as of Oct. 6. In each review, we refer to the symbol, returns and expense ratio of the share class that is available to most investors. The reason for this is that the share classes of specific funds offered in 401(k) plans can vary, depending in part on the size of the plan.
Vanguard Equity-Income: BUY
- Symbol: VEIPX
- Expense ratio: 0.28%
- 1-year return: 32.0%
- 3-year annualized return: 11.1%
- 5-year annualized return: 12.3%
- 10-year annualized return: 13.6%
- Rank among the top 401(k) funds: #52
- Best for: Investors looking for a steady dividend fund.
Two longtime fund managers recently stepped down at Vanguard Equity-Income, which is a member of the Kiplinger 25 – our favorite actively managed no-load funds. But we're not adjusting our Buy recommendation for the fund – yet.
Although manager changes can be tricky, in VEIPX's case, the managers who left are part of Vanguard's in-house quantitative equity group, which relies on a complex algorithm to choose stocks. That computer model shouldn't change with the new guard. Plus, the quant group runs just one-third of the portfolio.
However, the lion's share of the portfolio is run by Wellington Management's Michael Reckmeyer, who recently announced plans to retire in June 2022. That could affect our thoughts on the fund moving forward, so stay tuned.
Since Reckmeyer arrived in mid-2007, Vanguard Equity-Income has returned 9.2% annualized. That lags the 10.6% gain in the S&P 500, but it beats 89% of funds that invest in large-company stocks trading at a value. It's important to bear in mind that value stocks have lagged their fast-growing growth stock counterparts for much of the past five years. Compared with a value-tilted index, the S&P 500 Value, Vanguard Equity-Income comes out ahead by an average of 1.6 percentage points per year.
Reckmeyer favors high-quality companies that pay increasingly higher dividends over time. "We focus on sustainable payouts and companies that increase dividends on an annual basis," he says, "because over the long haul, dividends drive 40% of returns over the years."
But Reckmeyer likes a good bargain. He prefers to step in when the market overreacts to bad short-term news. "It's a bit of a contrarian take to dividend investing," he says. He picked up shares in the paint and coatings company PPG Industries (PPG) in early 2020, for instance, after shares in the economically sensitive stock plummeted as global economies fell into a recession. Reckmeyer had long been watching the stock and saw a deal in shares in the global company, which boasts a strong balance sheet and steady cash flow. Since then, PPG shares have recovered 77%.
Vanguard Equity-Income might not beat the S&P 500 over time. But it's not too far behind, and the ride is smoother than that of the broad index. Plus, the fund's dividend yield, 2.2%, beats the current 1.30% yield of the S&P 500.
Vanguard Explorer: BUY
- Symbol: VEXPX
- Expense ratio: 0.41%
- 1-year return: 37.9%
- 3-year annualized return: 17.6%
- 5-year annualized return: 19.0%
- 10-year annualized return: 16.7%
- Rank among the top 401(k) funds: #78
- Best for: Aggressive growth minded investors looking for exposure to small-company stocks.
Vanguard Explorer holds stock in growing, small to midsize companies. It's one of a handful of small-company stock funds that rank among the top 100 401(k) funds. But while many are index-based, this one is actively managed. In fact, in keeping with the Vanguard way, many have a hand in VEXPX.
Managers from five different firms work independently, applying their own process to run their portions of the fund's assets:
- Wellington Management, for example, picks stocks with higher growth potential relative to their valuations.
- ClearBridge Investments focuses on industry leaders that generate substantial free cash flow (money left over after necessary expenses to sustain the business) and make wise capital allocation decisions.
- ArrowMark Colorado Holdings prefers high-quality companies with strong competitive advantages in industries with high barriers to entry.
- Stephens Investment Management and Vanguard's quantitative equity group round out the investing subadvisory team.
The hodgepodge management team results in returns that are just above-average. But the portfolio is enormous, with close to 780 stocks, and the fund has $24.5 billion in total assets, which makes VEXPX the biggest actively managed small-company fund in the country. Finally, multiple changes in subadvisory managers over the years – and even recently – makes it difficult to confidently assess how the fund will fare over a full market cycle.
Seven of the 10 managers on the fund have been in place for nearly five years. And in each of the four full calendar years since the start of 2017, Vanguard Explorer has outpaced the Russell 2000. In other words, you have been better off in Explorer than in a small-company index fund over that time.
Just bear in mind: Because small-company stocks tend to be more volatile than large-company stocks, VEXPX should be a held as a complement to a core holding in large-company stock fund or a total stock market fund.
Vanguard Inflation-Protected Securities: BUY
- Symbol: VIPSX
- Expense ratio: 0.20%
- 1-year return: 5.7%
- 3-year annualized return: 4.3%
- 5-year annualized return: 2.9%
- 10-year annualized return: 4.3%
- Rank among the top 401(k) funds: #76
- Best for: Older investors in small doses to hedge against inflation.
With inflation running higher than it has in nearly a decade, Treasury Inflation-Protected Securities (TIPS) are more in the news. Annual inflation for the 12-month period ending in August, the most recent data available, was 5.3%. That's more than double the roughly 2% rate of annual inflation over each the previous five calendar years.
Investors who want to stay ahead of rising consumer prices typically turn to TIPS because on top of a guaranteed rate of interest, the principal of the bond moves in step with the rate of inflation.
But yields on TIPS have been negative for months. Vanguard Inflation-Protected Securities' current yield, for instance, is negative 1.7%. That doesn't mean, however, that you will earn a negative return in this fund. Rather, the fund's return will be the rate of inflation less the negative yield. Over the past 12 months, for instance, despite negative yields, VIPSX has gained 5.7%.
Longtime fund manager Gemma Wright-Casparius favors short-term maturity TIPS these days. Almost half of the fund's assets are invested in TIPS with maturities of less than five years. Vanguard studies show that short-term TIPS are more stable during periods of inflation surprises than medium- and long-term TIPS.
Vanguard Inflation Protected Securities is best for retired, or nearly retired, investors. Younger investors can fend off inflation with the returns in their hefty stock portfolios, and annual salary raises will help, too. However, retirees typically don't have either of those advantages.
Vanguard International Growth: BUY
- Symbol: VWIGX
- Expense ratio: 0.44%
- 1-year return: 20.3%
- 3-year annualized return: 22.6%
- 5-year annualized return: 19.2%
- 10-year annualized return: 14.1%
- Rank among the top 401(k) funds: #36
- Best for: Foreign stock exposure.
We have long lauded Vanguard International Growth as a superstar for delivering above-average returns with below-average risk. But we're feeling a little cautious these days because a key manager is leaving in April 2022.
Investment firm Baillie Gifford is one of two subadvisers that run the fund, but it manages the biggest chunk (70%) of the assets. And James Anderson, a manager since 2003, is leaving. Comanager Thomas Coutts remains, however, and he's been in place since late 2016. Lawrence Burns was named comanager in 2020.
Managers from Schroders run the remaining 30%, and nothing is changing there. Simon Webber has been with the fund since late 2009, though he too, has a new comanager in James Gautrey, who joined in late 2020.
The two firms, both U.K.-based, have slightly different approaches to picking growth stocks; Vanguard chose them to complement each other. Baillie Gifford is willing to pay up for stocks with explosive growth. Schroders' ideal stock is underappreciated but growing fast.
The portfolio holds roughly 120 stocks, mostly in large companies domiciled in developed countries. But China stocks make up 17% of the assets. Chinese internet powerhouses Tencent Holdings (TCEHY) and Alibaba Group (BABA), for instance, are two of the portfolio's biggest holdings and make up nearly 8% of assets. Those stocks have underperformed recently because of a regulatory crack-down on tech firms and other shake ups in China. But other top holdings have posted triple-digit percentage gains over the past 12 months, including biopharmaceutical Moderna (MRNA) and ASML Holding (ASML), which makes lithography systems that helps semiconductor makers to make smaller and smaller chips.
VWIGX has long been one of our favorite international stock funds. But we'll be watching it carefully over the next year or two. Fund manager changes can sometimes (but not always) result in some portfolio volatility as new managers settle in and make their mark.
Vanguard Primecap: BUY
- Symbol: VPMCX
- Expense ratio: 0.38%
- 1-year return: 30.7%
- 3-year annualized return: 14.4%
- 5-year annualized return: 17.4%
- 10-year annualized return: 17.5%
- Rank among the top 401(k) funds: #7
- Best for: A core holding for aggressive investors with long time horizons.
Vanguard Primecap was closed to all investors long ago, but if it's offered in your 401(k) plan, you can still put away up to $25,000 a year. Consider yourself lucky. Vanguard Primecap is a superb fund run by five of the best stock-pickers in the country.
The managers – Theo Kolokotrones, Joel Fried, Alfred Mordecai, M. Mohsin Ansari and James Marchetti – work independently managing their own slice of the fund's assets. But they each aim to invest in growing companies that trade at bargain prices. In particular, they look for a catalyst – a new product, new executives at the helm or a restructuring – that they think will push a stock price higher over the next three to five years.
Once they buy a stock, they tend to hang on. The fund's 6% turnover ratio is a fraction of the 55% to 87% turnover of typical U.S. stock funds that invest in large companies.
"Because the Primecap team is buying stocks facing near-term uncertainty, it often takes time for their ideas to work out," says Dan Wiener, editor of The Independent Adviser for Vanguard Investors. "But in contrast to many other growth managers, the Primecap team is willing to wait, and on average holds onto a stock for a decade."
VPMCX's record isn't blemish-free, of course. Despite a 10-year annualized record that beats the S&P 500, Vanguard Primecap has lagged the index in five of the past 10 full calendar years, most recently in 2020. A sizable helping of airlines stocks – including Southwest Airlines (LUV), United Airlines (UAL) and American Airlines (AAL) – hurt the fund when the economy shut down for COVID-19.
But over the long haul, Vanguard Primecap shareholders have gotten a lot richer. A $10,000 investment 20 years ago in VPMCX would be worth nearly $80,000 today; a similar investment in Vanguard 500 Index fund would be worth $55,000. And that doesn't include any regular monthly 401(k) contributions you might make.
This is an aggressive fund, best for investors with long time horizons and a stomach for some volatility.
Vanguard U.S. Growth: BUY
- Symbol: VWUSX
- Expense ratio: 0.38%
- 1-year return: 25.5%
- 3-year annualized return: 26.6%
- 5-year annualized return: 24.4%
- 10-year annualized return: 20.3%
- Rank among the top 401(k) funds: #91
Best for: Steely investors with a long time horizon who want exposure to fast-growing, large companies and can withstand a lot of volatility.
Vanguard U.S. Growth has put up some good returns in certain years – lately, a 59% return in 2020 – but it has had to deal with a lot of change. For starters, it has twice absorbed the assets of a poorly performing peer fund – Growth Equity in 2014 and Morgan Growth in 2019.
Then there's the constant rotation of subadvisers at the fund. According to Morningstar, eight partial manager changes have occurred at the fund since 2010. The latest on took place in early 2021. Vanguard jettisoned investment firm Jackson Square as a manager after 11 years. Four subadvisers remain: Wellington Management, Jennison Associates and Baillie Gifford – each runs roughly 28% of assets – and Vanguard's in-house quantitative equity group, which runs the rest. This year, the quant group is undergoing its own reshuffling; longtime members of the team James Stetler and Binbin Guo both retired.
All that moving around of parts is troubling, and it makes assessing the long-term merits of a fund tricky. But based on more recent performance, things are going swimmingly. VWUSX's five-year annualized return beats the S&P 500, most of its peer group and even Vanguard Primecap, the firm's venerated growth-company fund. It has been a bumpy ride, though. Over the past five years, this Vanguard fund has experienced above-average volatility compared with all large-company growth funds.
If U.S. Growth is the only actively managed large-company growth fund offered in your 401(k), and you have the stomach for a lot of volatility, it's a solid option. If you're not that kind of investor, however, you might consider other options in your plan that come with less uncertainty (as far as management goes) and a little more steadiness in performance.
Vanguard Wellesley Income: BUY
- Symbol: VWINX
- Expense ratio: 0.22%
- 1-year return: 11.7%
- 3-year annualized return: 9.4%
- 5-year annualized return: 7.5%
- 10-year annualized return: 8.0%
- Rank among the top 401(k) funds: #96
- Best for: Conservative investors.
Vanguard Wellesley Income celebrated its 50th anniversary in July. But it's not the oldest stock-and-bond fund in Vanguard's stable. That honor goes to Vanguard Wellington, which we'll get to momentarily.
But unlike Wellington, Wellesley Income tilts more toward bonds than stocks. Two-thirds of its assets are bonds, while the rest is stocks. (Wellington holds more stocks than bonds).
The hefty bond holding makes for a steady fund. Over the past half century, according to Dan Wiener, editor of The Independent Adviser for Vanguard Investors, Wellesley Income's "standout feature is its steadiness."
Steadiness and muted returns often go hand in hand, however. Over the past 15 years, VWINX's 7.2% annualized return doesn't keep pace with the broad market, but it beats 96% of its peers: funds that allocate 30% to 50% of assets to stocks.
Michael Reckmeyer runs the stock side and Loren Moran picks the bonds. Both managers are veterans of Wellington Management – an investment firm with long-term ties that subadvises many of Vanguard's best-known actively managed funds. Similar to Vanguard Equity-Income, which Reckmeyer also helps to manage, we'll need to keep an eye on VWINX going forward.
With the heavy load of bonds in its portfolio, Wellesley Income is best suited to conservative investors.
Vanguard Wellington: BUY
- Symbol: VWELX
- Expense ratio: 0.24%
- 1-year return: 21.2%
- 3-year annualized return: 12.4%
- 5-year annualized return: 11.7%
- 10-year annualized return: 11.4%
- Rank among the top 401(k) funds: #10
- Best for: Moderately conservative investors who seek an all-in-one portfolio that holds stocks and bonds.
Vanguard Wellington has a long history and a standout long-term record. Founded in 1929, it is the nation's oldest balanced fund. Roughly two-thirds of the fund holds stocks; rest of the portfolio is devoted to bonds.
VWELX – another member of the Kiplinger 25 – has undergone a bit of a changing of the guard at the top. Daniel Pozen, a comanager since 2019, took over as sole manager of the stock side of the fund in July 2020; Loren Moran, a comanager on the bond side since 2017, is now the fund's sole bond picker after a comanager retired in June 2021.
On the stock side, Pozen favors high-quality large companies with a competitive edge over peers. Alphabet (GOOGL), Microsoft (MSFT) and Facebook (FB) were top holdings at last report. He has trimmed the number of stocks in the portfolio from the high 80s to the high 60s since taking over.
"There are only so many great ideas in the market at any time that we should lean into the best ideas and make sure they can impact shareholders' investment outcomes," Pozen says.
Stocks aren't required to pay a dividend to be considered for the portfolio, but roughly 85% of the stocks in the fund do.
On the bond side, Moran tilts heavily toward high-quality corporate debt, but spices up returns with investment-grade asset-backed securities and taxable municipal bonds. She holds roughly one-quarter of the fixed-income portfolio in Treasuries and agency bonds to maintain liquidity – easy access to cash – in VWELX. That's less than the typical 30% of assets that peer balanced funds hold on average.
"Our liquidity buffers are something we focus on," Moran says. But with interest rates so low, "shareholders aren't being paid a lot," she adds, so she has dialed her cash position down.
Vanguard Wellington is a moderate-risk investment choice because it holds both stocks and bonds. But it still packs a punch. Compared with other balanced funds, VWELX boasts above-average returns and below-average volatility. Over the past five years – which includes the period that Moran has been with the fund – Vanguard Wellington beats 88% of its peers with an 11.7% annualized return. It yields 1.2%. But yet again, we'll be watching the fund closely given the manager change.
Vanguard Windsor II: HOLD
- Symbol: VWNFX
- Expense ratio: 0.34%
- 1-year return: 41.4%
- 3-year annualized return: 15.4%
- 5-year annualized return: 15.0%
- 10-year annualized return: 14.5%
- Rank among the top 401(k) funds: #35
We're upgrading the recommendation on Vanguard Windsor II this year a tad, to a Hold from a Sell.
In last year's review of Vanguard's most popular 401(k) funds, we said that investors who had chosen an S&P 500 index fund over Vanguard Windsor II would have done better over the past decade. That's still true.
But context matters. VWNFX focuses on value-priced stocks – and those stocks have lagged growthier shares by a wide margin. And relative to its peers – funds that invest in value-priced large companies – Vanguard Windsor II is starting to shine brightly. Over the past two years, the fund's 23.8% annualized return ranks among the top 3% of all large value funds.
A change in management might be behind the fund's recent fortunes. In late 2019, Vanguard dismissed two subadvisers and added a new one: Aristotle Capital Management. Aristotle joins three other firms: Lazard Asset Management, Sanders Capital and Hotchkis & Wiley Capital Management.
Each firm has a value bent but slightly different approaches. Lazard focuses on highly profitable companies trading at low relative valuation. Hotchkis & Wiley favors measures such as tangible assets, sustainable cash flow and the potential for business performance to improve. Sanders looks for companies that trade at a discount to its assessment of expected total return. And Aristotle likes to invest in high-quality businesses all over the world that trade at attractive prices and that have a catalyst to kick share prices up over a three- to five-year period. The firms run slivers of the portfolio independently. As a whole, the fund holds roughly 180 stocks.
Since adding Aristotle, the fund has taken a heavier tilt toward technology from the high-single digit exposure of previous years, says Morningstar Analyst Alec Lucas. At last report, tech stocks made up 20% of the fund. Alphabet, Apple (AAPL) and Microsoft sit near the top of the portfolio.
The good news: That has been good for performance. The bad news: It means VWNFX is a tad more growthy than some of its large-company value fund peers. But Windsor II still retains a distinct value profile: The portfolio's price-to-earnings (P/E) ratio of 18 is higher than the 16 P/E of other large-value funds, but it's a far cry from the 31 P/E ratio of the typical growth fund. We're comforted, too, by how well the fund performed between mid November 2020 and June 2021 when value stocks soared over fast-growing companies. During that roughly 6.5-month period, Vanguard Windsor II held up fabulously, beating the S&P 500 by nearly nine percentage points. It beat 61% of its peers, too. Of course, that is a blip of a time period, especially for retirement savers who are investing for the long term. Even so, it's a good indication that the fund firm has finally got a winning combination of managers.
We're more optimistic about the future of Windsor II, but we're still watching it closely, which explains the Hold recommendation.
Vanguard Target Retirement Funds: BUY
- Rank among the top 401(k) funds: #11 (VTHRX, 2030); #12 (VTTVX, 2025); #15 (VTTHX, 2035); #19 (VFORX, 2040); #23 (VTWNX, 2020), #25 (VTIVX, 2045), #29 (VFIFX, 2050); #65 (VFFVX, 2055); #82 (VTXVX, 2015); #88 (VTINX, Income)
- Best for: Savers who want to make one investment decision and leave the rest to the experts.
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. When the fund hits its target year, the work doesn't stop. Vanguard Target Retirement funds continue to shift its blend of stocks and bonds for seven years after the target year. At that point, the money in the fund automatically rolls into Vanguard Target Retirement Income, which holds a static allocation of roughly 30% stock and 70% bond.
A small change is ahead for Vanguard's target-date funds. The firm actually has two target-date series: the Institutional Target Retirement funds and the Target Retirement funds. They are run with exactly the same strategy, same glide path (the blend between stocks and bonds that shifts over time as the target date nears). But Institutional Target Retirement was created for specifically for defined contribution plans; Target Retirement is available to retail investors as well as in some defined contribution plans. Come February 2022, however, the Institutional series will be absorbed into the Target Retirement series and expense ratios across all target-year funds will fall to 0.08%.
That's a bonus for retirement savers, some more than others. Vanguard Target Retirement 2045, 2050 and 2055 currently charge 0.15% in annual expenses, so this fee cut represents a nearly 50% drop in fees. Expenses aren't uniform across the target-date series currently, so shareholders in the nearer dated funds stand to save a little less. The investor share class of Vanguard Target Retirement 2030, for instance, charges 0.14% per year. In any case, Vanguard fees are already about 75% cheaper than most of its peers – one feature we've always liked about the series.
Another thing this series has going for it is simplicity. Vanguard Target Retirement funds hold just five to six index funds in their portfolios, depending on the target year. Four of the funds are total market funds – Vanguard Total Stock Market Index (VTSAX), Vanguard Total Bond Market Index (VBTLX), Vanguard Total International Stock Index (VTIAX) and Vanguard Total International Bond Index (VTABX). The series also includes a short-term inflation-protected securities index fund in the nearer-dated years.
Investors should feel confident choosing a Vanguard Target Retirement fund for their retirement savings. These products are straightforward, low-cost and do all of the work for you.