3 Vanguard Funds That Thrive in 401(k) Plans

Vanguard has changed retirement saving as we know it in many ways. But one of the lasting legacies that strikes truest with the average American is just how inexpensive they've made it to invest.

Under visionary founder Jack Bogle, Vanguard created the concept of the index fund—a product that by its nature allows for lower costs. Thirty years later, expenses have plummeted lower on funds across the board—though Vanguard remains a favorite in most types of retirement plans, including the ubiquitous 401(k).

Indeed, you're likely to find a wealth of Vanguard options in your 401(k) and other retirement plans. And given that they're typically competitive on both price and performance, they should be among the first funds you look at.

I want to shine a light on the best Vanguard funds for a 401(k) plan. These funds have been selected for a number of reasons, including their size, strategy, and potential for showing up in 401(k)s, though your plan might hold all, some, or none of these. However, they've also been selected for their tax-inefficiency, as the tax-deferred nature of a 401(k) allows you to enjoy the fund's performance without the year-to-year tax consequences.

This last part also makes these funds ideal for holding in other tax-advantaged accounts, such as individual retirement accounts (IRAs) and health savings accounts (HSAs).

Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as personalized investment recommendations. Act at your own discretion.

What to Mind in Your 401(k)

When you invest your retirement savings in an account like a 401(k), you'll want to keep a few things in mind.

• Costs. Let's say you pay $5 in expenses for every $100 a mutual fund earned you. That's $5 that wouldn't grow and compound for you over time. So if all else is equal, the lower the cost, the better. (Just keep an open mind; some funds justify their higher fees.)
• Income. You probably want your retirement portfolio to produce at least some regular income—in the form of both bond interest and dividend income. Stock prices can suffer during nasty corrections and bear markets, but income-generating funds can help provide for your living expenses without forcing you to sell at an inopportune time. How much income your account should produce depends on your own circumstances.
• Taxes. A taxable account (like a standard brokerage account) is better suited to take advantage of certain tax-advantaged investments, such as municipal bonds. For tax-advantaged accounts, such as 401(k)s, some of the best investments include bond funds (where the interest income won’t be taxed) and actively managed stock funds (where the capital gains distributions from heavy trading, aka "turnover," won’t be taxed).
• Diversification. You've probably heard that your portfolio should be "diversified," which means holding a variety of investments, whether that's holding multiple assets (stocks, bonds, alternative investments), but that could also mean holding, say, stocks from different countries, or stocks from different sectors. Also, every fund has its own built-in level of diversification; some spread their assets around evenly while others might hold some very concentrated positions.

Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested's free retirement planning newsletter.

The Best Vanguard Retirement Funds for Your 401(k)

These Vanguard retirement funds are ordered by their Morningstar Portfolio Risk Score for the trailing 10-year period. You can get risk scores and other data through Morningstar Investor (which I'll briefly discuss after I examine these funds).

Here are the risk levels each score range represents: 

• 0-23: Conservative
• 24-47: Moderate
• 48-78: Aggressive
• 79-99: Very Aggressive
• 100+: Extreme

Importantly, these scores are a general gauge of risk compared to all other investments. For example, a bond fund with a score of 20 might be considered a conservative strategy overall, but it could simultaneously be riskier than a number of other bond funds.

Related: 9 Best Vanguard Retirement Funds [Save More in 2026]

1. Vanguard Short-Term Treasury Index Fund Admiral Shares

• Style: Short-term U.S. Treasury bond
• Management: Index
• Assets under management: $33.4 billion*
• SEC yield: 3.8%**
• Expense ratio: 0.06%, or 60¢ per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 6 (Conservative)

No retirement asset allocation is complete without bond funds. As an asset class, bond funds play an important role in lowering volatility and providing regular income. However, bond interest is taxable at your federal income tax rate—if you're in the 37% tax bracket, then you're losing 37% of your bond interest to taxes—and because interest is the predominant source of returns on bonds, bond funds are best held in tax-advantaged accounts such as IRAs.

Between 2022 and 2024, the yield curve was inverted (inversion is when short-term rates are higher than long-term rates). That's no longer the case, but short-term bonds still offer relatively high yields for relatively low risk. Thus, it makes sense to keep a decent chunk of your overall bond exposure in short-term bond funds, such as the Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX).

VSBSX tracks the Bloomberg US Treasury 1-3 Year Bond Index—a collection of roughly 90 federal bond issues with maturities of between one and three years. U.S. Treasuries are among the best-rated bonds on the planet, meaning that the major credit-rating agencies believe bonds issued by our federal government are likelier than most to repay you fully with interest. These bonds are considered all the more secure given their short maturities—at most, these bonds will mature in just three years, which is a relatively small time for the security of those bonds to change.

Related: The 13 Best Mutual Funds You Can Buy

One of the most critical metrics to consider when considering bond funds is duration, which is a measure of interest-rate sensitivity. As an example, a bond with a duration of two years would see its price rise by 2% if interest rates fell by 1 percentage point (or conversely, would see its price fall by 2% if interest rates rose by 1 percentage point). The actual calculation of duration is fairly complex; it's the weighted average of the bond's cash flows. But the key takeaway is that, all else equal, the longer a bond's time to maturity, the higher its duration—and thus the higher the interest-rate risk.

VSBSX has a very low duration of just 1.9 years. And in return, you currently receive a yield that's closer to 4% than it is to 3%. That combination of low risk and competitive income makes Vanguard Short-Term Treasury Index Fund one of the very best Vanguard retirement funds you can own in an 401(k).

This mutual fund, like many Vanguard index funds, is also available as an ETF: the Vanguard Short-Term Treasury ETF (VGSH, 0.03% expense ratio), which trades around $60 per share currently.

* Many Vanguard funds have multiple share classes, including ETFs. Listed net assets for Vanguard funds in this story refer to assets under management across all of a given fund's share classes.

** SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.

Related: The 11 Best Fidelity Funds You Can Own

2. Vanguard Balanced Index Fund Admiral Shares

• Style: Moderate allocation
• Management: Index
• Assets under management: $58.8 billion
• Dividend yield: 2.1%
• Expense ratio: 0.18%, or $1.80 per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 40 (Moderate)

Most of the funds that you and I own, and that we talk about, are single-asset funds: stock funds, bonds funds, and so on. And we mix and match these funds to put together a whole portfolio for ourselves.

However, funds like Vanguard Balanced Index Fund Admiral Shares (VBIAX)—referred to as "balanced" or "allocation" funds—are a whole portfolio unto themselves, giving us virtually everything we need in a single product. And Vanguard Balanced Index Fund specifically is a "moderate allocation" fund that invests roughly 60% of its assets in stocks, and the other 40% in bonds.

The stock "sleeve" is a massive 3,200 stocks wide. Large-cap stocks* account for the majority (70%) of assets, while mid-caps make up 20% and smalls are responsible for the remaining 10%. Top holdings are similar to what you'd get in a large-cap equity fund: Nvidia (NVDA), Apple (AAPL), Google parent Alphabet (GOOG, GOOGL). It's heavily tilted toward the technology sector, though it also has significant weights in financials, health care, communication, and industrials.

Related: The 12 Best Vanguard ETFs to Buy [Build a Low-Cost Portfolio]

The bond portfolio is extremely broad, too, at more than 10,000 debt issues. The allocation is extremely similar to VBTLX; half of the fund's bond assets are invested in U.S. Treasuries or agency debt, 25% is in corporates, 20% is in government MBSes, and the rest is sprinkled across several debt types.

Balanced funds aren't without their weaknesses. For instance, many of the most popular such funds have little to no international exposure (in stocks and bonds alike); that's the case with VBIAX, so if you do want that exposure, you'd have to add it via additional individual securities or funds. Also, you have to want the specific balance the fund offers—a 60/40 fund, for instance, won't deviate much from that blend. So if Vanguard Balanced Index Fund Admiral Shares is too conservative (or aggressive) for you, you'd either have to find a different fund to act as your core, or augment your portfolio with additional exposure where you need it.

VBIAX has a moderate amount of turnover, plus it generates both dividend and interest income. So it's one of the best Vanguard funds for 401(k)s and other tax-advantaged accounts, but it will definitely have tax consequences in a traditional brokerage account.

* There are different ways to define "cap" levels. We're adhering to Morningstar's definition, which says the largest 70% of companies by market capitalization within a fund's "style" are large caps, the next 20% by market cap are mid-caps, and the smallest 10% by market cap are small caps.

Related: 9 Best Schwab Funds You Can Buy: Low Fees, Low Minimums

3. Vanguard Explorer Fund Investor Shares

• Style: U.S. small-cap growth stock
• Management: Active
• Assets under management: $19.8 billion
• Dividend yield: 0.4%
• Expense ratio: 0.44%, or $4.40 per year for every $1,000 invested
• Morningstar Portfolio Risk Score: 86 (Very Aggressive)

Retirement savers with a high risk tolerance who want to try to turbocharge their returns might consider Vanguard Explorer Fund Investor Shares (VEXPX), which invests in predominantly American small- and midsized stocks with growth potential.

The actively managed VEXPX owns about 740 stocks with an average market cap of $8 billion—well within the traditional mid-cap range ($2 billion to $10 billion), though the majority of its holdings fall into the small- ($500 million to $2 billion) and micro-cap ($500 million or less) ranges. Top holdings include the likes of optical materials specialist Coherent (COHR) and insurance software company Guidewire Software (GWRE).

Related: 7 Best Vanguard Dividend Funds [Low-Cost Income]

While larger companies also have the potential for outsized growth, smaller companies, as a group, tend to be more explosive—for better or worse. They benefit from investing's rule of large numbers (effectively, doubling your revenues from $1 million to $2 million is a lot easier than doing so from $1 billion to $2 billion). And when institutional investors become interested in these stocks, large influxes of new investment money can send their stocks skyward.

But they're riskier. Smaller firms have fewer and narrow revenue streams, meaning if a core product line struggles, it can more easily lead to stock turbulence and losses. They also have less access to capital than larger companies, so if times get tight, it's harder for them to survive.

Funds like VEXPX help defray that risk by allowing you to buy many smaller companies at once, so one stock's failure doesn't torpedo your portfolio's worth. That risk is further reduced by Explorer's management style—holdings are selected by five different investment advisors that manage independent subportfolios, allowing them to use their specialities to generate outsized returns while preventing any one manager's strategy from upending the entire fund's performance.

Turnover is elevated, too, at about 50%, but you can snuff out that liability by holding VEXPX in a 401(k) or other tax-advantaged account.

Interested in more Vanguard funds for your 401(k)? Check out these other popular choices.