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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
How to Buy a Refrigerator, Step by Step
How to Buy a Refrigerator, Step by Step

Here’s how I got the perfect appliance at the perfect price.

14 Things We Buy and Then Almost Never Use
14 Things We Buy and Then Almost Never Use

Save your money. These items seem alluring but they often end up as coat racks and dust magnets.

How to Get Rid of 6 Hard-to-Sell Things
How to Get Rid of 6 Hard-to-Sell Things

Find out where to sell, donate or recycle items — and feel good about it.

7 Mistakes Guaranteed to Ruin Your Retirement
7 Mistakes Guaranteed to Ruin Your Retirement

Make even one of these money mistakes, and you’ll probably end up eating ramen noodles in your golden years.

9 Hidden Ways to Get More Out of Amazon
9 Hidden Ways to Get More Out of Amazon

You don’t have to be a Prime member to take advantage of these little-known perks of shopping on Amazon.

View this page without ads

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

Get Started

Most Popular
11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

20 Things That Are Actually Worth Stockpiling
20 Things That Are Actually Worth Stockpiling

You don’t need a year’s supply of toilet paper to survive an outbreak, but consider stocking up on these items.

Can a Twice-Divorced Woman Claim Social Security Survivors Benefits?
Can a Twice-Divorced Woman Claim Social Security Survivors Benefits?

Understanding survivors benefits rules is the key to getting the most from your benefit.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

These Are the 10 Worst Cars for Depreciation
These Are the 10 Worst Cars for Depreciation

Two types of vehicles are especially likely to see steep plunges in value.

Never Buy These 10 Things With Your Credit Card
Never Buy These 10 Things With Your Credit Card

Credit cards offer many conveniences and protections, but sometimes it’s simply smarter to keep the plastic tucked away.

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

These practical products make everyday life a little easier.

10 Things I Always Buy at Trader Joe’s
10 Things I Always Buy at Trader Joe’s

From snacks to sweets to side dishes, stock your cart with these time-tested favorites on your next TJ’s run.

8 Surprising Household Items You Can Sell for Fast Cash
8 Surprising Household Items You Can Sell for Fast Cash

Sometimes, the humblest household items are worth the most money.

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

There are easy high-paying majors available in the U.S. — and no bachelor’s degree is required. We’re here to help you find easy degrees that pay well.

Cut These 11 Expenses Now If You Hope to Retire Early
Cut These 11 Expenses Now If You Hope to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

5 Ways Social Security Will Change in 2021
5 Ways Social Security Will Change in 2021

These adjustments will affect both workers and retirees in the new year.

Stop Buying These 19 Things Online
Stop Buying These 19 Things Online

The internet has changed how we shop. But for some things, you’re still better off buying the old-fashioned way.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

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 Food Supply
7 Tips for Building an Emergency Food Supply

A pandemic or natural disaster could leave you reliant on your existing emergency food supply. Is your pantry well-prepared for emergencies? Knowing what to stock up on for emergencies can be a difficult task and we’re here to help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

Seniors With COVID-19 May Display This Unusual Symptom
Seniors With COVID-19 May Display This Unusual Symptom

Largely asymptomatic seniors may experience a symptom not commonly associated with the coronavirus.

8 Things You Should Buy at Restaurant Supply Stores
8 Things You Should Buy at Restaurant Supply Stores

You don’t have to be a chef or a restaurant owner to shop here.

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.