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This is part one of an occasional series on the best offerings from the fund families that hold most retirement plans. To read part two, on Fidelity, click here.
If your 401(k) nest egg is resting with Vanguard Group, you are in good hands. One of the biggest players in the pension business, as it is in mutual funds, Vanguard got that way by providing superior investment options.
And because it is owned by its shareholders, not a for-profit company, its expenses are the lowest in the industry. In investing, you get what you don't pay for.
But even in Vanguard, some funds are better than others. I often get questions from Vanguard customers about which are the best.
So recently I polled a group of financial advisers about Vanguard funds they would recommend to their 401(k) clients. I was delighted with their recommendations but shocked to discover that their favorite funds are often intentionally excluded from retirement plans.
I'll explain why in a moment, but meanwhile, if any of these funds strike a chord with you and you company plan doesn't include these options, badger your company's investment committee to add them. Or consider gaining access some other way, such as through an individual retirement account.
The funds below cover most of the important asset classes. And the fund nominated by the most advisers, Vanguard Wellington (VWELX), covers pretty much everything all by itself. If it's available to you, it could be the only choice you need.
Wellington "is a near-perfect choice," says Kimberly A. Cox of West Financial Services in McLean, Va., offering "an education in asset allocation, investment selection and discipline."
Wellington, founded in 1928, was the first balanced fund in the industry. It was intended to be the only mutual fund an investor needed and therefore covered the staple asset classes, stocks and bonds. Today it has 65% of assets in big-company stocks (including the 13% in foreign stocks), 32% in high-quality intermediate-term bonds and the balance in cash. Turnover is very low, the expense ratio is a tiny 0.27%, and performance is exceptional. It ranks among the top 10% of funds in Morningstar's moderate-allocation category.
Spice it up
A far racier portfolio is also popular with advisers, but you probably can't buy it. Vanguard Capital Opportunity (VHCOX) is a midcap fund, meaning it buys midsize stocks. It has shot up an average of 12.8% annually over five years through July."It is run in the growth-at-a-reasonable-price style by what could be argued is the single best growth-stock manager in the United States, Primecap Management out of Pasadena, Calif.," says Daniel P. Wiener, the editor of the Independent Adviser for Vanguard Investors newsletter.
The problem, Wiener says and Vanguard confirms, is that it and many other top Vanguard performers are deliberately withheld from 401(k) plans.
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A Vanguard spokeswoman explains: "A lot of the more narrowly focused funds, and I would include Capital Opportunity Fund as among them, are not encouraged for 401(k) plans. This is a midcap growth fund, so because (this) small representation of the market represents (higher) risk, we don't really recommend that plan sponsors include that fund."
If you can't buy Capital Opportunity in your company plan, you can't buy it at all, because it's closed to new investors.
2 you can (probably) find
Primecap does, however, manage two other funds in a similar style, and one of them may be available in your plan. They are Vanguard Primecap (VPMCX) and Vanguard Primecap Core (VPCCX).Both are big-company growth funds that, like Wellington and Capital Opportunity, are Morningstar Analyst Picks, meaning the best of their breed. The expense ratio of Primecap, at 0.43%, is as low as many non-Vanguard index funds and less than one-third the industry average. Primecap Core charges 0.55% in expenses. Vanguard passes economies of scale along to shareholders.
Primecap has $30.85 billion in assets and is closed outside retirement plans because of its size. Primecap Core has only $3.14 billion and is open.
Another great choice for long-term investment portfolios is Vanguard REIT Index Fund (VGSIX), which invests not in stocks but in real-estate investment trusts.
"This is a great diversifier," says Ken Weingarten, a financial adviser in Lawrenceville, N.J. "It is very low cost," he points out, charging just 0.2% in expenses. It's also a very timely purchase because real estate has come back from a bear market. This fund is about even this year through July, but it's still down 9% over the last 12 months.
The problem: "I have clients who have Vanguard 401(k)/403(b) plans, and the REIT index fund is not in their plans," Weingarten says.
Says the Vanguard spokeswoman, referring to the "undue" risk of Capital Opportunity: "Same for the REIT index fund."
This is boneheaded, by the way. Everyone should own a REIT fund, as well as a fund holding midcap stocks. If your plan doesn't include these options, try to get them added. Your company's investment committee, not Vanguard, has final say over what funds each plan can offer.
Continued: Small stocks and junk bonds
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