A 401(k) is an employee savings plan that comes with an employer's matching contribution and significant tax advantages. With a 401(k), employee's contributions are automatically taken from each paycheck and placed in an investment account.

Most 401k plans have annual contribution limits and many employees endeavor to match their employer contributions in order to maximize this annual contributions limit. Some may choose to pay taxes and then fund their 401k account, where the money grows tax free. Others may go for a tax break on their investments, and accept a tax deduction when they withdraw money.

Hence, maximizing the benefits of a 401(k) plan involves making informed choices about investment strategies, managing contributions effectively and optimizing tax efficiency.

This blog provides you with useful information on the best investment vehicles and strategies for your 401k. You can also schedule a meeting with an investment advisor and financial planner for real time help on managing contributions effectively and optimizing tax efficiency.

Key Takeaways

• Leading financial advisors and financial planners to help you maximize your 401k plan are William Huston and Ekenna Anya-Gafu.
• Top-performing funds for 401k plans include Bay Street Capital Holdings, Baron Partners Fund, Fairholme Fund, Fidelity Capital & Income Fund, Fidelity Growth Discovery Fund, and T. Rowe Price Global Stock Fund.

Disclaimer

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.

Work with Bay Street Experts

To maximize your investment gains from your 401k plan, it is advisable to collaborate with seasoned investment professionals such as William Huston, the Chief Investment Officer (CIO) at Bay Street Capital Holdings, who can help you reach your financial goals quicker and guide you to financial freedom.

William and his accomplished team at Bay Street represent a well-rounded group of investment specialists, covering various areas including public equities, venture capital, real estate and alternative investments. Their expertise can assist you in selecting suitable investments and funds, as well as structuring a high-performing portfolio for your 401(k) retirement savings.

Top performing funds for 401k

Here are some of the top-performing funds you should definitely consider for your 401k investments.

1. Baron Partners Fund

The Baron Partners Fund, managed by billionaire investor Ron Baron, is a high-growth stock fund that's known for its bold and concentrated investment approach. Baron's strategy allocates a significant portion of its assets, about 40%, to Tesla Inc. (TSLA) stock and an additional 8.5% in a private SpaceX investment.

Despite the fund's more speculative nature, it boasts an impressive track record, consistently ranking high on mutual fund performance charts. Over the past decade, it has delivered a remarkable compound annual growth rate exceeding 20%, and since its inception in 1992, it has achieved a 15% annual return.

2. Fairholme Fund

Under the leadership of renowned value investor Bruce Berkowitz, the Fairholme Fund boasts a commendable long-term track record, despite facing some challenges during the 2010s.

While the fund's 10-year average return of 8.3% may not be the most impressive compared to other funds in this category, it has demonstrated a recent resurgence. In the past year, it delivered an impressive return of 49.6%, with an average of 21.6% over the last three years.

The Fairholme Fund has allocated a substantial 82% of its portfolio to a particular stock, which witnessed an impressive 48% growth in earnings during the first half of last year.

Clearly, the Fairholme Fund carries substantial concentration risk. Nevertheless, it's uncommon to find legendary investors willing to stake their reputations on a single significant stock investment. While such a fund may not be suitable as the primary equity allocation, investors seeking to introduce some growth potential with higher risk into their portfolio may consider the Fairholme Fund.

3. Fidelity Capital & Income Fund

Fidelity Capital & Income Fund stands out as one of the top-performing fixed-income mutual funds. While its returns may not rival those of high-growth stock funds, it boasts an impressive 10-year average return of 6.2%, a remarkable feat in the realm of fixed income.

This fund is actively managed by Brian S. Chang and Mark J. Notkin, and it concentrates on the high-yield bond market. These bonds are typically issued by financially troubled corporations or occupy a subordinate position in a company's capital structure. Despite the increased risk of potential default, investors receive higher interest rates as compensation.

These bonds are usually rated BB or B, and are often referred to as "junk bonds." It's important to note that the term "junk" shouldn't unduly worry investors. The diversified portfolio of FAGIX ensures that a single bond default won't have a significant impact on the fund's overall performance. In its most recent quarterly report, the fund held a diverse array of 495 different securities across various sectors.

Given the fundamental role of fixed income in constructing a well-balanced investment portfolio, it's worth considering an allocation to FAGIX due to its compelling combination of risk and return.

4. Fidelity Growth Discovery Fund

The Fidelity Growth Discovery Fund employs a straightforward strategy that mirrors the growth-at-a-reasonable-price (GARP) investment philosophy, which involves identifying high-quality stocks with rapid earnings growth at reasonable valuations.

By avoiding companies with excessively high valuations, the fund safeguards itself from substantial losses often experienced in more speculative, growth-focused funds. And this has earned the fund a neutral risk rating from Morningstar, the same rating as the Fidelity 500.

While its primary focus is on U.S. stocks, including top holdings like Nvidia and Apple, the fund is open to exploring global high-growth opportunities, holding investments in various international markets such as Taiwan, the Netherlands, and India.

Currently under the management of Fidelity portfolio managers Jason L. Weiner and Asher Anolic, the fund boasts a stellar long-term track record of outperformance. Since its inception in 1998, it has consistently delivered an average return of 9.7%, surpassing its benchmark, the Russell 3000 Growth Index.

With a net expense ratio of 0.83%, the fund offers a more cost-effective option compared to many alternatives, making it an attractive choice for investors seeking exposure to well-established growth stocks.

5. T. Rowe Price Global Stock Fund

The T. Rowe Price Global Stock Fund is designed to help investors benefit from the growth potential of international stocks while maintaining a solid exposure to U.S. stocks. About 40% of the fund's assets are allocated to markets such as Japan, the United Kingdom, and Germany, while the remainder is invested in U.S. stocks.

This balanced approach has proven to be quite successful, with PRGSX achieving an impressive 10-year average return of 13.3%, making it one of the top-performing international mutual funds. For investors considering diversifying their portfolios across various regions, PRGSX is certainly worth considering, despite its 0.82% net expense ratio.

How does a 401(k) work?

In a 401(k) plan, an employee designates a portion of their taxable income to be automatically deducted, paired with an employer match and invested in their account. Participants have the option to decide how they want to distribute their funds among the investment options provided by the plan, typically including various mutual funds.

The money within a 401(k) account experiences tax-deferred growth with the benefit of compounding interest. To illustrate, if you contribute $500 from each paycheck to your plan, you won't be subject to income taxes on that money or the interest it generates in the given tax year. Instead, the earned interest is reinvested, effectively allowing your interest to earn additional interest.

What is the best 401k plan for me?

The best 401k plan depends on the years left before official retirement, financial goals, and risk tolerance. Working with a financial advisor is always in your best interest, since they have the expertise to guide your choice both for a 401k plan and investment vehicles.

Some of the typical investment choices for 401k plans consist of stock mutual funds, which focus on stocks and may have specific themes like value or dividend stocks. An example of a commonly chosen financial institution is an S&P 500 index fund, which includes major American companies and serves as a foundation for many 401(k) portfolios.

If you're considering investing your 401(k) funds in any of these options, consider arranging a meeting with Ekenna Anya-Gafu, who serves as the President of Wealth Management at Bay Street. He can also provide insights into additional investment opportunities that align with your financial objectives and help you achieve your goals.

Bay Street Capital Holdings

Bay Street Capital Holdings, situated in Palo Alto, is a well-known wealth management firm. Under the leadership of William Huston, a three-time honoree on Investopedia's Top 100 Financial Advisors list, the company emphasizes comprehensive risk management as a priority over solely focusing on profit maximization.

It's worth mentioning that Bay Street Capital is one of only two Black-owned businesses among the nineteen distinguished firms in California. Their commitment to diversity and making a positive social impact has garnered them acclaim, including being finalists in respected industry awards.

Sources

https://money.usnews.com/investing/articles/best-performing-401-k-funds

https://www.usatoday.com/money/blueprint/investing/best-401k-investments/

https://www.cnbc.com/2020/01/09/exactly-how-to-pick-investments-for-your-401k.html