Are You Paying Too Much in Investment Fees? Here’s One Way to Tell

Mutual funds
Photo by JohnKwan / Shutterstock.com

The expense ratio: It’s a fancy term for a critical concept. This investing cost can rob your nest egg of as much as hundreds of thousands of dollars over time if you aren’t paying close attention.

It’s easy to understand that keeping investing costs low is critical to retiring comfortably. But it can be difficult to understand just how much investing fees amount to — and whether those fees are low or high.

Average expense ratios can serve as a comparison starting point. If you know the average expense ratios for the types of investments you have, you can compare those ratios with the industry averages to get a general sense of whether you’re paying too much.

Why mutual funds and expense ratios are important

A mutual fund is a pool of investments such as stocks, bonds or both — and therein lies one of its advantages. As Money Talks News founder Stacy Johnson explains in “Ask Stacy — How Do I Invest in a Mutual Fund?“:

“The chief advantage of a mutual fund is that it allows an investor to own a small slice of a big portfolio. Diversifying with a bunch of stocks or bonds is much safer than putting all your money into one or two stocks or bonds.”

There are two main types of mutual funds: actively managed mutual funds and passively managed mutual funds, commonly called index funds.

Active mutual funds are run by a professional who aims to beat the market. Passive funds aim to mirror the performance of a market index — such as the Standard & Poor’s 500 stock market index — and require little management. In fact, they can be run by a computer. Due to these differences, active funds tend to come with heftier fees, and index funds tend to have much lower expenses.

The operating costs for mutual funds are generally passed on to investors as what’s known as an expense ratio. It’s expressed as a percentage of the money you invest in a mutual fund. So if a mutual fund has an expense ratio of 1 percent, you will pay $1 in fees for every $100 you invest in the fund.

How high expense ratios can damage your retirement

Expense ratios can sound negligible because they are expressed as a percentage. In reality, they can amount to thousands of dollars — even hundreds of thousands of dollars — by the time you retire.

Consider this example from our story “Of All the Fees You Pay, This One Is the Worst by Far”:

Say you have a 401(k) with a current balance of $25,000. Over the next 35 years, you earn an average return of 7 percent on that balance. Even if you didn’t contribute another penny to your account during those 35 years, here’s how much money you’d have if your account fees were 0.5 percent, compared with how much money you’d have if your fees were 1.5 percent:

Beginning balance Annual return Fees Balance in 35 years
$25,000 7% 0.5% $227,000
$25,000 7% 1.5% $163,000

So the higher fee cost you an additional $64,000 over 35 years — even though the fee was only 1 percent higher. That’s $64,000 less to live on in your golden years.

And that’s if your 401(k) had only $25,000 in it. Imagine how much money you would stand to lose in fees if you were more diligent about saving for retirement.

How to judge expense ratios

Knowing average expense ratios gives you a starting point for judging the expense ratios you are currently being charged.

We learned from a Morningstar study released in May that average expense ratios last year included the following:

  • All mutual funds: 0.57 percent average asset-weighted expense ratio
  • Actively managed mutual funds: 0.75 percent
  • Passively managed mutual funds, aka index funds: 0.17 percent

Now new data from NerdWallet gives average expense ratios for more types of mutual funds, including the following:

  • Equity mutual funds: 0.63 percent average asset-weighted expense ratio
  • Bond mutual funds: 0.51 percent
  • Hybrid mutual funds: 0.74 percent
  • Target-date funds: 0.51 percent
  • Money market funds: 0.18 percent
  • Equity index funds: 0.09 percent

If you’re unsure what expense ratios you are being charged on your mutual funds, consult the literature that came with the investments.

A document known as a “prospectus” — which you should have received upon buying a mutual fund — is the definitive mutual fund source to consult. Typically, you also can find this information online at the fund’s webpage.

For investments in 401(k) accounts, we discuss other such documents to consult in “Of All the Fees You Pay, This One Is the Worst by Far.”

Prospectus documents tend to be lengthy and can be intimidating to the average person, though. When I want to cut right to the chase, I use FINRA’s Fund Analyzer. It’s no substitute for reading a prospectus, but it’s a free tool that enables you to evaluate mutual fund expenses and compare expenses of one fund with another.

What are your thoughts on expense ratios? Let us know below or on Facebook.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Read Next
How to Stop Living Paycheck to Paycheck in 8 Steps
How to Stop Living Paycheck to Paycheck in 8 Steps

Does it feel like your paycheck is gone the moment you get it? You can break that vicious cycle.

5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs
5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs

Here’s how to lower your health care costs without skimping on care.

8 Retailers That Offer Free Prescription Drug Delivery
8 Retailers That Offer Free Prescription Drug Delivery

You won’t have to leave the safety of home to get prescriptions if you use these pharmacies.

This Is the Best Used Car You Can Buy
This Is the Best Used Car You Can Buy

This car combines reliability, safety and long-lasting value.

10 Ways Retailers Trick You Into Spending More
10 Ways Retailers Trick You Into Spending More

Think you’re a savvy shopper? Find out how retailers persuade you to dig more deeply into your wallet.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on both everyday and occasional purchases.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

15 Outrageously Overpriced Products — and How to Save on Them
15 Outrageously Overpriced Products — and How to Save on Them

Retailers mark up products by hundreds of times their cost — but you don’t have to pay the premium.

Why Half of Retirees Now Owe Taxes on Social Security
Why Half of Retirees Now Owe Taxes on Social Security

Growing numbers of seniors are paying taxes on their Social Security benefits, but you might be able to avoid this fate.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.