Capital Group’s American Funds family of mutual funds is the one of largest in the world, behind 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. Whether you are an employer, an advisor, or an employee wanting to choose the best funds for your work 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) plan choices, because they create a win for all involved parties. The three main parties involved—the employer, the advisor, and the employee putting money into the plan—stand to gain from using them. The employer’s interest in having the best 401(k) plan is strategic. If you want to hire the best employees, you’ll need to offer good benefits. While employees want to see a company matching the money they put into their 401(k)s, they also like to see a set of solid fund choices in their plans. Employers are also wise to include a number of high-quality, low-cost funds in the 401(k) plans that they offer because of their fiduciary duty to watch out for their workers’ best interests. Employers are legally tasked with having solid, proven fund choices in their 401(k) plans. Prudent advisors also know that they need to suggest the funds that are best for people who want to invest for the long-term. They also have a fiduciary duty to place the interests of 401(k) clients ahead of their own. It can be a challenge to suggest high-quality funds to clients who want to work hard and save for the future. This is where American Funds come into play for advisors.
Why Brokers Like to Use the Best American Funds for Retirement
Brokers and other types of advisors that get paid by commission like to use American Funds because of the above-average long-term returns and below-average expense ratios. They also provide a means of paying commissions or trailers to the broker. Commissioned-based advisors don’t use Vanguard or Fidelity most of the time, because they’re true no-load funds. American Funds either charge loads or 12b-1 fees that can go to pay the broker.
American Funds R Shares: ‘R’ Is for Retirement
Most of the share class types of mutual funds on the market are either Class A shares (front-load) or Class B shares (backload contingent deferred sales charge). Loads don’t work in 401(k) plans because of complex administration and costs. To get around the sales charge challenge in 401(k) plans, brokers can use American Funds Class R shares for retirement plans like 401(k)s. Class R shares don’t have a front-load or back-load sales charge, but most of them do carry an annual expense. Since expenses are a big factor in long-term returns (all other things being equal, higher expenses result in lower returns), you’d be smart to lean toward the cheapest R shares from American Funds.
Best American Funds for 401(k) Plans
Although 401(k) members don’t get to choose which funds go into a 401(k) plan, they still get to choose which funds to invest in among those offered in the plan. This list of the best American Funds for 401(k) plans is mostly geared toward the decisionmakers (employers, trustees, and advisors). Still, it’s meant to be useful for 401(k) members as well. To help you compare, look at the costs of the A share class, which is the most popular fund to buy outside of 401(k) plans, and the cheapest R share version, which is mostly the R6 shares. American Funds, Fundamental Investors: One of the funds with a top rating in the American Funds lineup is the Fundamental Investors Fund. It’s often in the top 10% of funds in the large-blend group. If you’re looking for active management, this fund might be a better choice than a passively managed S&P 500 index fund. The Class R-6 shares (RFNGX) have costs of just 0.28%, which compares to 0.61% for the Class A shares (ANCFX). American Funds, Washington Mutual Investors Fund: If you’re looking for a large-cap value fund to balance out your growth and blend fund, Washington Mutual Investors Fund is a great choice. The fund’s long history (started in July of 1952) and stable performance make Washington Mutual a retirement investing staple. The Class R-6 shares version (RWMGX) has an expense ratio of 0.27%, and the Class A shares version (AWSHX) has expenses of 0.59%. American Funds, SMALLCAP World Fund: Americans Funds has a good lineup of large-cap funds that focus on U.S. stocks. 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. Class R6 shares (RLLGX) have expenses of 0.67%, and the Class A shares (SMCWX) expenses are 1.06%. The American Funds lineup includes dozens of more choices, but these four are the cream of the crop. One weakness of American funds is their bond fund choices. If 401(k) plans offer balanced funds, an honorable mention goes to the American Funds Balanced Portfolio (BLPAX for Class A shares and RBAGX for Class R6 shares). It’s also important to note that these featured funds are good, no matter the share class. The lower the expense ratio, the better, and remember to avoid paying loads.
