Why American Funds Work Well in 401(k) Plans
American Funds are an ideal choice for 401(k) plans because they create a win-win situation for all parties involved. The three main stakeholders – the employer, the advisor, and the employee who contributes money to the plan – all benefit from their use.
The employer’s interest in having the best 401(k) plan is strategic. If you want to attract the best employees, you need to offer good benefits. While employees want to see the company match the money they put into their 401(k) accounts, they also appreciate having a strong range of investment options in their plans.
It is also wise for employers to include a number of high-quality, low-cost funds in the 401(k) plans they offer due to their legal duty to act in the best interest of their workers. Employers must have strong, proven fund options in their 401(k) plans.
Wise advisors also know that they need to recommend the funds that are best for those who want to invest for the long term. They also have a legal duty to put the interests of 401(k) clients ahead of their own. It can be challenging to recommend 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 Using the Best American Funds for Retirement
Brokers and other commission-based advisors like using American Funds because of their long-term returns that outperform the average and their low expense ratios. They also provide a way to pay commissions or fees to the broker.
Advisors who earn commissions often do not use American Funds because they are no-load funds. American Funds charge either fees or 12b-1 fees that can go toward paying the broker.
American Funds Class R: The R Stands for Retirement
Most types of mutual funds in the market are either Class A shares (front-end load) or Class B shares (deferred back-end load). Loads do not work in 401(k) plans due to costs and complex management.
To overcome the issue of sales loads in 401(k) plans, brokers can use Class R shares from American Funds for retirement plans like 401(k). Class R shares do not carry sales or purchase charges, but most do have annual fees.
Since costs are a significant factor in long-term returns (all else being equal, higher costs lead to lower returns), you should lean toward the cheapest Class R shares from American Funds.
Best American Funds for 401(k) Plans
Although 401(k) plan members do not have the right to choose the funds that go into the 401(k) plan, they do have the right to select the funds they invest in from those offered in the plan.
This list of the best American Funds for 401(k) plans is primarily directed toward the decision-makers (employers, advisors, and fiduciaries). However, it is also intended to be helpful for 401(k) plan members. To assist you in comparing, look at the costs of Class A shares, which is the most popular fund type to buy outside of 401(k) plans, and the cheaper Class R share version, which is mostly Class R6.
American Funds, Growth Fund of America: This fund is a large-cap growth fund. This means you will be exposed to stocks like Amazon (AMZN) and Alphabet (GOOG). While it is not the best performer in the American Funds lineup, the Growth Fund of America is one of the oldest and most reliable. The expense ratio for Class R-6 (RGAGX) is only 0.30%, compared to 0.64% for Class A (AGTHX).
American Funds
American Funds, Fundamental Investors: One of the highest-rated funds in the American fund lineup is the Fundamental Investors Fund. It often ranks in the top 10% of large-cap core funds. If you’re seeking active management, this fund might be a better choice than the passively managed S&P 500 index fund. The costs for the R-6 share class (RFNGX) are just 0.28%, compared to 0.61% for the A share class (ANCFX).
American Funds, Washington Mutual Investors Fund: If you’re looking for a large-cap value fund to balance a growth fund and a blend fund, the Washington Mutual Investors Fund is a great choice. The fund’s long history (it started in July 1952) and stable performance make it a cornerstone for retirement investing. The R-6 share class version (RWMGX) has an expense ratio of 0.27%, while the A share class version (AWSHX) has expenses of 0.59%.
American Funds, World Small Fund: American Funds has a good selection of large-cap funds focused on U.S. equities. If you want a fund with an aggressive stance that includes small- and mid-cap stocks from around the world, the World Small Fund is the best choice. The costs for the R6 share class (RLLGX) are 0.67%, while the costs for the A share class (SMCWX) are 1.06%.
The American fund lineup includes many other options, but these four are the best. The downside of American Funds is the fixed income fund options. If the 401(k) plans offer balanced funds, the honorable mention goes to the American Funds Balanced Fund (BLPAX for the A share class and RBAGX for the R6 share class).
It’s also important to note that these standout funds are good, regardless of the share class. The lower the expense ratio, the better, and remember to avoid paying penalties.
Disclaimer
The information provided on this site is for discussion purposes only. It should not be considered investment advice or a recommendation to buy or sell securities.
Source: https://www.thebalancemoney.com/best-american-funds-for-401k-plans-4147463
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