I have been on Morningstar’s 401(k) committee for more than 25 years. In that capacity, I work with colleagues to choose and monitor the funds available to employees in that plan. Although options for 401(k)s have grown, we’ve long had a core philosophy of selecting highly rated, low-cost funds that should work for employees over the long haul.
As Morningstar’s plan size has grown, we’ve been able to move to cheaper share classes, and the list of available funds is a little larger than it was when I started at Morningstar. We try to cover all the important areas needed for a diversified portfolio. We also want to provide options for different investor types, so there is an overlap built in. We don’t intend for employees to own every single fund.
Making changes to 401(k) lineups takes time, so we favor reliable funds that are supported by deep teams and thus likely to endure over the long haul.
Even at Morningstar, some employees need a hand in building their portfolios, so we provide two simple options for those who don’t have the expertise or time to do it themselves. We have Vanguard target-date funds and a Morningstar-managed portfolio option in which our allocation specialists select funds based on the employee’s profile.
Let’s take a look at our lineup. I’m going to show the fund ticker that’s in the Morningstar 500, though in practice, we have some institutional share classes because they are cheaper. (Very obvious disclosure: I own many of the below mentioned funds.)
A good target-date fund is well-designed, cheap, and provides steady performance, making investing easy. The same is true for Vanguard’s broad index funds. So, a target-date fund comprising Vanguard index funds figures to be very cheap and quite low maintenance, and that’s why our plan carries Vanguard’s entire Target Retirement suite. For example, at 0.08%, Vanguard Target Retirement 2030 VTHRX is a bargain. The fund has a 10-year return of 7.7% annualized, and its worst single-year loss over that period was 16.6% in 2022.
Large Caps
Dodge & Cox International Stock DODFX is a well-run classic value fund. Dodge’s team of managers works with an outstanding group of analysts to build a diverse portfolio of foreign stocks. The firm is owned by its employees, and they must sell their firm shares back when they leave. That’s a recipe for stability. This is in the top five of my 401(k) because it’s one of the best value funds around, and I trust Dodge & Cox’s culture to keep the fund pointed in the right direction.
Harbor Capital Appreciation HACAX is the yin to Dodge’s yang. Run by Jennison’s growth team, the fund seeks out fast-growing companies with strong research and development that can sustain their growth. Top holdings include tech giants like Nvidia NVDA, Amazon.com AMZN, Microsoft MSFT, and Meta META. This one is also in my top five. It covers a key engine of the economy, and Jennison has the research chops to stay ahead of the curve.
Oakmark Select OAKLX is a focused, flexible value fund that is willing to buy names that are usually considered to be growth if the price is decent. Manager Bill Nygren is 66, so he’s probably not too far from retirement, but we like the comanagers poised to succeed him.
Vanguard Developed Markets Index VTMGX is a quick way to blanket the rest of the world outside the US, except for emerging markets. The fund charges only 0.05% and returns are in the top third of the foreign large-blend Morningstar Category over the trailing five-, 10-, and 15-year periods.
Vanguard FTSE Social Index VFTAX is a large-cap index screened for environmental, social, and governance criteria. For all the drama around ESG, it’s interesting to note that this fund’s returns have been very close to Vanguard Institutional Index VINIX, our 401(k)’s S&P 500 fund. The S&P 500 fund is slightly ahead for the trailing five years, and the ESG fund is slightly ahead for the trailing 10 and 15 years.
Vanguard Institutional Index gives you the S&P 500 for just 4 basis points. Vanguard 500 Index VFIAX is the version for individual investors; it also charges 0.04%.
Vanguard International Growth VWILX is an excellent active fund that charges just 0.25% in expenses. Baillie Gifford runs two-thirds of the assets, and Schroders runs one-third. The fund’s 10-year return of 9.64% annualized beats the benchmark’s 6.00% gain.
Small and Mid-Caps
DFA International Small Company DFISX is mostly passive but not completely. It doesn’t track an index, and it is meant to provide access to foreign small caps. It trades opportunistically to put bid-ask spreads to work for investors rather than have them work against them, as they would in a conventional index fund. The fund has become more accessible, but it is still not on every platform for investors, so check yours to see.
Primecap Odyssey Aggressive Growth POAGX is a bolder, smaller-cap-tilting version of the firm’s strategy. It uses deep fundamental research to look for companies with sustainable advantages. The fund tends to invest a decent amount in biotechnology. This one is also in my top five. Primecap has historically done very well investing across the market-cap spectrum, and I want my aggressive funds to be much more than simple momentum portfolios.
Royce Small-Cap Special Equity RYSEX is a great diversifier and a nice shelter from the market’s storms. Charlie Dreifus and team focus on companies with clean accounting, cheap valuations, and solid balance sheets. That defensive nature works wonderfully in bear markets and recessions. Just don’t look for it to put up huge numbers in big rallies.
Vanguard Selected Value VASVX uses three subadvisors to provide low-cost small- and mid-value exposure. Pzena, Donald Smith & Co., and Cooke & Bieler each have distinctive takes on value, leading to a diverse portfolio.
Vanguard Small-Cap Index VSMAX makes small-cap investing simple for just 0.05% in expenses.
Wasatch Small Cap Growth WAAEX offers an appealing, moderate take on small-growth investing. The fund is mostly in steady growers, but it also has some early-stage high-risk names and a good chunk in cyclicals. Longtime manager J.B. Taylor’s pending retirement spurred us to lower the fund’s People rating one notch to Above Average and its Morningstar Medalist Rating to Silver from Gold.
Emerging Markets
We have three emerging-market funds. You really just need one, but each has a very different approach.
American Funds New World NEWFX is an appealing fund that boasts a deep team of managers and analysts, yet very low expenses for an emerging-market fund. It takes the unusual approach of devoting a large portion of the portfolio to companies with substantial revenues from emerging markets rather than focusing only on those domiciled in emerging markets. It’s a smart tactic, and it means that the fund tends to outperform when developed markets beat emerging markets. It’s one of my top-five holdings because Capital Group has outstanding managers and analysts. It also appeals to me for a 401(k) as its reduced volatility compared with the typical emerging-market fund makes it easier for investors to stick through down markets.
Vanguard Emerging Markets Stock Index VEMAX gives you emerging-market exposure for just 0.13%. The downside is that emerging markets are not terribly efficient, so the fund’s long-term returns are merely average for the category, despite the cost edge. This fund’s 10-year returns are 5.6% annualized compared with 7.5% annualized for the New World fund. On the plus side, that 5.6% is much better than the 3.5% annualized returns produced by our third emerging-market fund.
Invesco Developing Markets ODMAX has been a disappointment. It had been a long-term outperformer, but most of its macro bets in recent years have hurt the fund. That’s why Invesco replaced manager Justin Leverenz with its UK-based emerging-market team. We actually rate that team pretty highly, so we maintained the fund’s Above Average People and Process ratings, and it remains Bronze overall. William Lam and team have strong records on their other funds, so the hope is that they can repeat that success here.
Inflation Hedges
We have three very different inflation hedges. You could own all three because they are so different.
Vanguard Short-Term Inflation-Protected Securities Index VTAPX just joined the Morningstar plan in October. We previously had Pimco Real Return PRTNX. The reason we are switching to the Vanguard fund is that we wanted a Treasury Inflation-Protected Securities fund that had low interest rate risk. Sometimes interest rates spike when inflation does, and in those cases, long-term TIPS lose money just when you want them to come through in the face of inflation. This short-term TIPS fund has a 2.4-year duration versus 7.0 years for the Pimco fund. In 2022, the former lost 4.5% in the rate spike, while the latter lost 14.5%. Both recouped some losses later that year.
Pimco Commodity Real Return Strategy PCRAX provides commodities exposure with a bit of TIPS thrown in. Commodities tend to surge when inflation rises, so they are a nice hedge. However, they are super volatile, so I always emphasize that you should keep this as a small weighting in your portfolio. (The A shares have a Neutral rating, but the institutional shares in our 401(k) are Silver because of lower fees.)
Vanguard Real Estate Index VGSLX is a nice diversifier with an income kicker. It’s an investment type in the throes of major changes as demand for office real estate has shrunk, while demand for data centers has surged. Vanguard also has an international real estate fund if you want to diversify even further.
Bonds
Dodge & Cox Global Bond DODLX is a great way to diversify by region and currency. The fund has a heavy emphasis on corporate bonds to make the most of the firm’s deep corporate research. Returns have been outstanding.
Pimco Total Return PTTRX brings all of Pimco’s strengths to bear in a wide-ranging bond fund. Since taking over in 2022, Mohit Mittal has made the fund a little more aggressive following a stretch of mediocrity. The fund beat its benchmark in 2024 and is comfortably ahead this year, so things are looking up. This is a top-five holding in my 401(k).
T. Rowe Price High Yield PRHYX is a sensible high-yield fund that has a sound process for managing risk while still earning a nice yield.
Loomis Sayles Bond LSBRX is the boldest bond fund in the lineup. It mixes high yield with currency plays, investment-grade corporates, government debt, and more. There’s a contrarian bent to the whole thing. Expect a bumpy ride with this one. The fund is set to adopt a target income payout in 2026.
Vanguard Total Bond Market Index VBTLX is very much on the other side of the spectrum, with modest risks and a large exposure to government debt. Market-cap-weighted index funds like this tend to have a lot of money in government and agency debt. That means less credit risk than most peers in the category, so active funds tend to beat it when the economy is strong and lag it during recessions. It’s a nice, cheap way to cover the core part of a bond portfolio so that you can be bold in other parts of the fixed-income world.
