Fees might be eating up your retirement savings. How to stop it.
Expense ratios can聽easily make or break your retirement savings.
These numbers, shown as a percentage, represent the amount investors pay for a mutual fund, index fund or ETF on an annual basis. And because that fee is skimmed out of the invested assets, many investors pay it no mind 鈥斅爋r fail to realize it exists.
狈别补谤濒测听聽surveyed in a聽聽study last year erroneously believed they pay no investment fees. Oh, what a world that would be.
The reality: There鈥檚 no getting around investment expenses. But you can work to minimize them, and the first step is knowing what you鈥檙e paying 鈥� and what鈥檚 fair.
Even small fees add up
Over the course of a person鈥檚 career, these fees can amount to large sums of cash. Even an expense ratio as small as 0.25% 鈥� that鈥檚 $2.50 for every $1,000 invested 鈥� makes a big difference聽over time. Here鈥檚 how a one-time investment of $100,000 is affected over 30 years:
| Expense Ratios on a $100,000 Investment | |||
|---|---|---|---|
| Expense ratio | 0.25% | 0.50% | 1.0% |
| Total cost of expenses | $51,857 | $99,788 | $186,876 |
| Portfolio value after 30 years | $709,368 | $661,437 | $574,349 |
(Assumes 7% annual return with no further contributions.)
A fund鈥檚 expense ratio will be listed in its prospectus and on the fund company鈥檚 website, says David Larrabee, director at the CFA Institute, an association of investment professionals.
Your broker or account provider will also typically list the expense ratio on a fund鈥檚 information page, which also mentions other details investors want to know, such as the fund鈥檚 rating, its past performance and the investments it holds.
The expense ratio varies by investment
In general, you鈥檒l pay the most for mutual funds that are actively managed and that invest in stocks. These mutual funds, known as equity funds, carry an asset-weighted expense ratio of 0.7%, according to the聽. Managed funds that invest in bonds cost less, averaging 0.57%.
Cheaper still are index funds and exchange-traded funds, a form of index fund that trades like a stock. These track an index like the S&P 500 rather than relying on active management. ICI data show equity and bond index funds have an average expense ratio of just 0.11%. ()
There鈥檚 good news: Expense ratios have headed down over the last decade or two, says Larrabee, largely due to a growth in assets.
鈥淎 lot of the expenses associated with mutual funds are fixed,鈥� Larrabee says. 鈥淭hey include the costs of running the fund 鈥� things like accounting fees and fees for the directors 鈥� and those don鈥檛 change.鈥� With assets growing but costs remaining about the same, expense ratios have dropped.
Consider fees when building your portfolio
Many 401(k) plans have only one or two choices in each fund category. This is one reason most investors benefit from switching to聽聽once they鈥檝e聽; IRAs have a wider range of investment options, making it easier to minimize fees.
That said, no matter where you are investing, you should work to keep costs down, which means selecting index funds where available. In general, if your choice is between a managed mutual fund and an index fund, the index fund is going to have a lower expense ratio 鈥� and research shows they stack up to or even beat managed funds in performance.
When choosing between mutual funds that are actively managed, consider not just fees, but other factors, such as the fund manager鈥檚 track record and the age and size of the fund (the SEC has a good聽, as well as a detailed聽).
鈥淛ust as you wouldn鈥檛 go out and buy the least-expensive car in the lot, there are other factors at play,鈥� Larrabee says.
That is less true of index funds and ETFs, as long as you鈥檙e comparing funds that are tracking the same benchmark.
Don鈥檛 forget transaction costs
In addition to expense ratios, there are transaction fees 鈥� such as commissions or loads 鈥� that factor into your overall portfolio expenses. Commissions generally come from stock or ETF trading; loads are tacked on to some mutual funds as a charge to either buy or sell.
Many investors can limit or avoid transaction costs by investing in聽(otherwise, because they鈥檙e traded like stocks, ETFs will incur commissions when bought or sold) and selecting no-transaction fee mutual funds.
If you engage in stock trading, you鈥檒l pay commissions, but you can聽聽by choosing a discount broker or one that offers聽, either as a promotion or on a regular basis, like the mobile app聽.
The bottom line
Expense ratios can pretty easily make a six-figure difference in your portfolio. You shouldn鈥檛 select an investment without knowing how much it costs. In most cases, investors can minimize costs by angling their portfolio toward low-cost index funds and ETFs.
Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website. Email:aoshea@nerdwallet.com. Twitter:聽.
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