American Funds 401k Review: Should you have it?

By Altay Gursel | February 22, 2021
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American Funds 401k Plans Explained

American funds 401k

You want to grow your 401k and wonder if American Funds are a viable option for you. In this post, we will talk about that.

The American funds’ retirement plans consist mainly of 401k, 403b and IRA accounts. However, the most popular one is the 401k plan. This is because of the flexibility it offers when it comes to retirement plans.

Company Background

American Funds Distributors LLC is a third party brokerage company that is subsidiary to the Capital Group Companies. It acts as a middleman allowing buyers and sellers to exchange their financial securities. 

The company was founded in 1931 by Jonathan Bell Lovelace and has more than 7,500 employees. The company headquarters is located in Los Angeles, CA and it serves US customers only. There is about $1.9 trillion in assets under management of American Funds which is quite substantial.

The key reason they are one of the respected companies in the US is because of their professional management or consulting group, which strives to provide their customers with the best services they can provide.

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Why American Funds 401(k) Plans a viable option?

American funds make perfect 401(k) retirement plan options as they build a win-win-win situation, which ensures that the three key parties involved the employer, the investment advisor and the plan’s employee would benefit from choosing them.

The employer’s interest in offering the best 401(k) package is mainly competitive. When you want to recruit the best employees, you’re going to have to deliver decent benefits. Sure, workers like to see businesses matching contributions but they would want to see a range of high-quality investment options from which to choose.

Employers are also wise to have a diverse range of high-quality, low-cost mutual funds in their 401(k) plans because of their fiduciary obligation to look out for the best interests of their employees. In other words, workers are legally liable in their 401(k) plans for providing reliable, time-tested investment choices.

Financially sound investment advisors also recognize that they have to recommend the right mutual funds suitable for long-term investors as they do have a fiduciary duty to advance the interests of 401(k) participants. It can be a struggle to suggest high-quality funds and get paid well for doing so. This is where the American Funds appear as a viable option to help advisors. 

Why Brokers Choose the Best American Funds for Retirement?

Stockbrokers and other types of licensed advisors tend to use American funds due to their unique distinction for being mutual funds with above-average long-term performance and below-average expense ratios while also supplying the broker with a way to pay fees or trailers.

Usually, commission-based advisors do not prefer Vanguard or Fidelity since they are true no-load funds; while American funds can charge loads or 12b-1 fees that can go to the broker to pay. In brief, brokers prefer American funds due to its unique ability to offer low-cost and high quality while earning a commission or kickback.

American Funds R Shares: ‘R’ Is for Retirement

The majority of American funds share class types on the sector are either A shares (front-load) or B shares (backload contingent deferred sales charge). Loads in 401(k) plans don’t fit due to logistical challenges and expenditures.

Brokers can use R shares for retirement accounts, such as 401(k)s, to get around the sales charge problem in 401(k) accounts. R share American funds have no sales charge at the front or back load but most of them charge a 12b-1 fee, up to a legal maximum of 1 %.

Because spending is a major factor in long-term performance (all other things being equal, higher spending leads in lower returns), investors are wise to move toward American funds’ cheapest R shares.

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What are the Best American Funds for 401(k) Plans?

While 401(k) participants will not be able to choose which mutual funds will go into a 401(k) plan, unless they’re on an investment committee with the right to pick funds for the plan, they will also be able to choose the funds to invest in along with those offered.

Hence this collection of best American funds for 401(k) plans is mainly targeted at decision-makers (employers, administrators, and advisors); however, the information is also valuable to 401(k) participants.

For reference purposes, I will include the A-share class expenses, which is generally the most common to acquire outside of 401(k) plans, as well as the cheapest R-share version, generally the R6 shares:

➡️ American Funds Growth Fund of America

This is a large-cap growth fund that can give you exposure to stocks such as Amazon (AMZN) and Alphabet (GOOG). While not the top performer in America’s fund portfolio, America’s Growth Fund is among the oldest and most successful. R-6 shares (RGAGX) have expenses of just 0.33%, compared to 0.66% for A-shares (AGTHX).

➡️ American Funds Fundamental Investors

Among the highest ranked funds in the American fund list, Fundamental Investors Fund has done exceptionally in the top 10 % of large-blend funds. It is a strong alternative to an actively managed S&P 500 index fund for investors seeking active management. R-6 shares (RGAGX) have expenses of just 0.31%, compared to 0.61% for A shares (ANCFX).

➡️ American Funds Washington Mutual

If you’re searching for a large-cap fund to stabilize your investment and blend fund, Washington Mutual is an excellent alternative. The fund’s long track record (beginning 07/31/1952) and solid performance make Washington Mutual a reliable investment for retirement. The R-share version (RWMGX) has an expense ratio of 0.30% while the A-share version expense ratio is 0.58%.

➡️ American Funds Smallcap World

American funds have an impressive lineup of large-cap funds focused on U.S. stocks, but if you plan to have an active fund holding small- to mid-cap stocks across the world, the Smallcap World Fund is the best decision. R6 shares (RLLGX) have 0.71% expenses and A shares (SMCWX) have 1.10% expenses.

The lineup of American funds includes dozens of more choices, but these four are the creme de la creme. One vulnerability that exists with American funds is the selection of their bond funds. If 401(k) plans offer balanced funds, the American Funds Balanced Portfolio (BLPAX for A shares & RBAGX for R6 shares) is an honorable mention.

It is also worth noting that these featured funds are good regardless of the class of shares. The smaller the expense ratio, the better, and bear in mind to avoid paying the loads.

American Funds Leadership Team

Name of RepresentativeResponsibility
Matthew O’ConnorHead of Distribution
Martin RomoResearch Director
Noriko Honda ChenPartner
John RenfroSenior Vice President & Chief Human Resources Officer
Canise ArredondoChief Financial Officer

RecordkeeperDirect & PlanPremier Program

The American Funds 401k is structured to help small business owners leverage their insurance package in a simplified 401k plan. The RecordkeeperDirect program for the business is easy and flexible enough for startups and SMEs to use. It offers record-keeping and investment options at a low cost.

The program is structured for under-250 participating businesses (401k) with gross investment assets of up to $3 million. Larger businesses have the right to opt for ‘PlanPremier.’ The plan is for businesses with more than 250 employees and financial assets bigger than $1.5 million.

Setup & Plan Administration

American Funds provide comprehensive assistance for initial set-up and continuing program management. The organization specializes in offering hands-on, business-building tools and custom sales services.

The plan administration service involves a review of the plans and finances, as well as one-on-one assistance. The organization also has a simple onboarding phase, through which you will receive many print and online tools that have all the details you need as a participant or sponsor of the program. That ultimately enhances the satisfaction of the employee.

Range of Features

The programs RecordkeeperDirect and PlanPremier are both easy to run. You are also getting personalized plan administration from third party administrators.

For the PlanPremier packages, you can either opt for the PlanPremier-TPA, which is a third-party administrator custom plan administration option, or the PlanPremier-Bundled option, from which you obtain American Funds plan administration.

Portfolio Analysis

Participants can pick from a large number of investments from a one fund family.  Most investment options are mutual funds, but you can also invest in target-date funds.

There are more than 1,000 mutual funds listed, from over 40 different investment managers like the mutual funds of American Funds. Plan sponsors can choose from 4 different types of ‘R Share’ which each provide different levels of compensation. There will be no front or back end loads.

Customer Service

The company provides sponsors and participants with 24/7 phone support. You’re linked with finance experts and advisors who can address all your concerns and provide solid investment advice.

For general questions, call 1-800-421-4225.

If you need assistance searching the American Funds website, you can call 1-800-421-4225 (ext. 99).

Fees, Costs & Expenses

American Funds has a comprehensive 401k program. Some points which distinguish American Funds as a brokerage are as follows:

American Funds have an 85 rating, which is nearly as high as its peer group’s average. The organization ranks in the top 15 % for flexibility, retention rate, account balance, pay deferment and total cost of the plan.

American Funds is the 3rd biggest mutual fund provider in the US.

High expense ratio, high-performance mutual funds and target-date funds.

Separate programs are available for small business owners and large business owners. Each plan is tailored according to different sizes.

Online tutorials for participants and sponsors on the program are available. Those outline in detail all the features and resources of the program.

American Funds is known for bringing excellent customer care and program management services. It will help you create the time to focus on issues like employee engagement, greatly increasing experience of your employees with your business.

What is American Funds Best Known for?

American Funds is one of the largest providers of retirement services and mutual funds, with over 360,000 plan providers across the US.

American Funds is best for:

  • Beginner Investors
  • IRA Accounts
  • Small Business Owners
  • Mutual Fund Investors

The company is known for its wide variety of mutual funds and its innovative approach to portfolio administration.

Is the American Funds 401k Plan Right for You?

American Funds offer mutual funds that are low-cost and of high quality. The company also provides small business owners with a good plan. Before making a final decision, make sure that you compare American Funds with other 401k providers.