Why This Record Low Number Is Great News for Your Retirement

Why This Record Low Number Is Great News for Your Retirement
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The rewards continue to pile up for anyone who has the discipline and determination to save for retirement.

Mutual fund fees fell to a new record low in 2018, Morningstar reports.

The asset-weighted average expense ratio reached an all-time low of 0.48% last year — down from 0.52% in 2017.

That’s a 6% decline from 2017 to 2018, according to Morningstar’s latest annual study of mutual fund fees. It is also the second-largest year-over-year percentage decline since Morningstar started tracking average asset-weighted expense ratios in 2000.

Passively managed mutual funds, aka index funds, continue to be far cheaper than their actively managed counterparts, on average.

According to Morningstar, the asset-weighted average fee for:

  • Passively managed funds fell to 0.15% in 2018 from 0.16% in 2017 — a roughly 6% decline.
  • Actively managed funds fell to 0.67% in 2017 from 0.71% in 2017 — a 5% decline and the largest drop that Morningstar has ever recorded for active funds.

Money Talks News founder Stacy Johnson further details the advantages of index funds in “Ask Stacy: Are Actively Managed Mutual Funds Better Than Index Funds?

What is an expense ratio?

An expense ratio is a measure of the cost of owning shares of a mutual fund. Morningstar says it examines average asset-weighted expense ratios because they are more reflective of what investors paid than simple average expense ratios.

The drop in mutual fund costs is a huge boon for retirement investors. According to Morningstar:

“[W]e estimate that investors saved roughly $5.5 billion in fund expenses in 2018 compared with 2017 fee levels. This fee decline is a big positive for investors because fees compound over time and diminish returns.”

Morningstar notes that the asset-weighted average expense ratio for mutual funds has fallen every year since 2000. In fact, investors now pay:

  • About half as much to own funds as they did in 2000. Back then, the asset-weighted average fee was 0.93%.
  • About 40% less than they did 10 years ago.
  • About 26% less than they did five years ago.

Why lower fees matter

All of this is remarkably good news for your retirement nest egg. As we detail in “Of All the Fees You Pay, This Is the Worst,” just a 1% difference in investment expenses can cost you hundreds of thousands of dollars in lost savings over time.

Lower fees mean millions more Americans will enjoy the retirement of their dreams. So, as the good news continues to pour in, maybe it’s time to take a moment and give thanks to John Bogle, the legendary founder of Vanguard Group.

To find out more about the debt all investors owe to Bogle — who died earlier this year — check out “Investing Pioneer Showed Us How Fees Rob Our Retirement Funds.”

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