Fees: The Quiet Leak

The story: Two funds, one leak

Ana and Marcus compare two fund statements and see how a small yearly fee grows into a big gap over 25 years.

1. Narrator: Ana and Marcus each have money in a fund that owns almost the same investments.
2. Marcus: My fund charges 1% a year. That sounds like nothing.
3. Ana: Mine charges 0.10%. Let’s see what that difference does over 25 years.
4. Narrator: In this example, $50,000 grows 6% a year before fees. After 25 years, the low-fee fund ends about $40,000 ahead.
5. Marcus: The fee comes out every year, and so does the growth that money would have earned.
6. Narrator: Fees compound too. Always know yours.

What you’ll learn

1. Three kinds of fees

   An expense ratio is a fund’s yearly fee. An advisory fee is what an advisor charges, often a percent of your balance each year. A sales load is a commission some funds take when you buy or sell.

2. Small percent, big dollars

   A fee comes out every year, and the money it takes can no longer grow. Over decades, that adds up to far more than the fee looks like on paper.

   Example: $50,000 for 25 years at 6% a year before fees grows to about $209,600 with a 0.10% fee and about $169,300 with a 1.00% fee.

3. Where to find fees

   Look on each fund’s fact sheet, your workplace plan’s yearly fee notice and any advisor’s agreement. Fees are often written in basis points: one basis point is one hundredth of a percent, so 0.10% is 10 basis points.

4. When paying is worth it

   Advice can be worth its price, for example with complex taxes, a big decision or staying calm in a market drop. The key is to know the price in dollars a year and what you get for it.

Key words

advisory fee

what an advisor charges, often a percent of your balance each year

load

a sales commission some funds take when you buy or sell

Also called: sales load

basis point

one hundredth of a percent, so 1% is 100 basis points

Common questions

Is a lower fee always better?

For two funds that do the same job, the lower fee usually wins. Different kinds of funds aren’t a fair match, so compare like with like.

How do advisors charge?

Common ways are a percent of your balance, a flat yearly fee, an hourly rate or commissions on products they sell. Asking “how are you paid?” is normal.

Remember this

Fees compound too. Always know yours.

Try it: Find your biggest fee

1. Find your biggest fund on a recent statement.
2. Look up its expense ratio on the fund fact sheet or your plan’s fee notice.
3. Work out the yearly cost in dollars: your balance × the fee.

No account needed: a recent statement and the fund’s fact sheet.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• How investment fees add up

  Source: Investor.gov (SEC)(opens in a new tab)

• What an expense ratio is

  Source: Investor.gov (SEC)(opens in a new tab)