Best American Funds for 401(k) Plans

Which American Funds Are Best to Use in 401(k) Plans?

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Find out why American Funds work well as 401(k) investment choices. GettyImages

If you've ever been a participant in a 401(k) plan, it's likely that you've seen or invested in the best American funds on the market.

The American funds family of mutual funds, offered by the Capital Group, is the third largest in the world, behind mutual fund giants, Vanguard and Fidelity, as measured by assets under management. Their massive presence in 401(k) plans in the U.S. is a big part of that success.

 

So, whether you are an employer, an investment advisor, or an employee wanting to choose the best funds for your employer-sponsored retirement plan, you'll want to take a look at the best American funds to buy for 401(k) plans.

Why American Funds Work Well in 401(k) Plans

American funds make ideal 401(k) investment selections because they create a win-win-win scenario, which is to say that the three main parties involved — the employer, the investment advisor and the employee participating in the plan — stand to benefit from using them. 

The employer's interest in providing the best 401(k) plan possible is primarily a competitive one. If you want to hire the best employees, you'll need to offer good benefits. Yes, employees want to see company matching contributions but they also like to see a set of high-quality investment choices to choose from as well.

Employers are also wise to include a diverse selection of high-quality, low-cost mutual funds in the 401(k) plans that they offer because of their fiduciary duty in watching out for their employees' best interests.

In different words, employers are legally responsible for offering quality, time-tested investment choices in their 401(k) plans.

Prudent investment advisors also know that they need to recommend the best mutual funds that are appropriate for long-term investors because they also have a fiduciary responsibility in placing the interests of 401(k) participants ahead of their own.

But recommending high quality funds and getting paid well to do it can be a challenge. This is where American funds come into play for advisors.

Why Brokers Love American Funds

Stock brokers and other types of advisors that get paid by commission like to use American funds because of their dual distinction of being mutual funds with above-average long-term returns and below-average expense ratios, while still providing a means of paying commissions or trailers to the broker.

Commissioned-based advisors don't typically use Vanguard or Fidelity because they're true no-load funds; whereas American funds either charge loads or 12b-1 fees that can go to pay the broker.

In summary, brokers love American funds because of their unique ability to offer high quality at a low cost while earning a commission or kick back.

American Funds R Shares: 'R' Is for Retirement

Most of the share class types of American funds on the market are either A shares (front-load) or B shares (back load or contingent deferred sales charge). But loads don't work in 401(k) plans because of administrative complexities and expenses (imagine loads being charged for every purchase or every time participants make changes).

To get around the sales charge challenge in 401(k) plans, brokers can use R shares for retirement plans like 401(k)s.

R share American funds don't have a front load or back load sales charge but most of them do charge a 12b-1 fee, up to the legal limit of 1.00 percent.

Since expenses are a significant factor in long-term returns (all other things being equal, higher expenses result in lower returns), investors are smart to lean toward the cheapest R shares from American funds.

Best American Funds for 401(k) Plans

Although 401(k) participants don't get to choose which mutual funds go into a 401(k) plan, unless they happen to be on an investment committee with power to select funds for the plan, they still get to choose which funds to invest in among those offered in the plan.

Therefore this list of best American funds for 401(k) plans is mostly geared toward the decision makers (employers, trustees, and advisors); however the information is also useful for 401(k) participants.

For comparison purposes, I'll provide the expenses of the A share class, which is usually the most popular to buy outside of 401(k) plans, and the cheapest R share version, which is typically the R6 shares:

  • American Funds Growth Fund of America: This fund is a large-cap growth fund, which means you'll get exposure to stocks like Amazon (AMZN) and Alphabet (GOOG). Although not the top performer in the American funds lineup, Growth Fund of America, is one of the oldest and most reliable. The R-6 shares (RGAGX) have expenses of just 0.33 percent, which compares to 0.66 percent for the A shares (AGTHX).
  • American Funds Fundamental Investors: One of the highest rated funds in the American funds lineup, the Fundamental Investors fund has consistently performed in the top 10 percent of funds in the large blend category. For investors looking for active management, this makes the fund a good alternative to a passively managed S&P 500 index fund. The R-6 shares (RGAGX) have expenses of just 0.31 percent, which compares to 0.61 percent for the A shares (ANCFX).
  • American Funds Washington Mutual: If you're looking for a large-cap value fund to balance out your growth and blend fund, Washington Mutual is an outstanding choice. The fund's long history (inception 07/31/1952) and consistent performance make Washington Mutual a retirement investing staple. The R shares version (RWMGX) has an expense ratio of 0.30 percent and the A shares version has expenses of 0.58 percent.
  • American Funds Smallcap World: Americans funds has an outstanding lineup of large-cap funds that focus on U.S. stocks but if you want an aggressive fund that holds small- and mid-cap stocks from all around the globe, the Smallcap World fund is the best option. R6 shares (RLLGX) have expenses of 0.71 percent and the A shares (SMCWX) expenses are 1.10 percent.

The American funds lineup includes dozens more choices but these four are the cream of the crop. One weakness that exists with American funds is their bond fund choices. If 401(k) plans offer balanced funds, an honorable mention is the American Funds Balanced Portfolio, (BLPAX for A shares and RBAGX for R6 shares).

It's also important to note that these featured funds are good no matter the share class. However, the lower the expense ratio the better, and remember to avoid paying loads.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.