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The Best Vanguard Funds for 401(k) Retirement Savers

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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.

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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.

Learn more about VEIPX at the Vanguard provider site.

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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:

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........

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