The stat about mutual fund fees that made me change my whole approach

I was just browsing through some old statements from my 401k and noticed a line item for expense ratios. Never really paid attention to it before. Turns out I was paying 1.2% annually on a fund that basically just tracked the S&P 500. Over 30 years that extra fee would cost me like $80k or more according to a calculator I found on Investor.gov. Switched to a basic index fund with a 0.03% fee the next day. Has anyone else run the numbers on what their fees actually cost long term?

4 comments

4 Comments

the_sam8h ago

Ran the numbers for my wife's old 401k and it was worse than yours. She was paying 1.8% on a "managed" fund that underperformed the market by 2% every year. Switched everything to a total market index fund at 0.04% and it felt like getting a raise. The compound math on fees is brutal when you actually see it on paper.

lindal132h agoProlific Poster

Actually the math does work that way because the fee is charged on top of whatever performance happens. If the index returns 8% and the managed fund returns 6%, that 2% gap is exactly what she lost compared to just owning the index, and the 1.8% fee came directly out of her pocket regardless. The total drag on her returns was still 3.8% when you count both the fee and the bad management.

mila_murphy217h ago

Honestly that's a great point but I gotta push back a little on the math. The 2% underperformance plus the 1.8% fee doesn't mean she was losing 3.8% every year compared to the index. The fee is already baked into the underperformance usually. So if the fund returned 6% and the index returned 8%, that 2% gap includes the 1.8% fee plus whatever else the manager did wrong. It's still terrible and you were right to switch but the numbers are slightly off. Like saying she was 3.8% behind double counts the fee. Anyway the main thing is you got her into a total market index which is the right move. The peace of mind alone is worth it.

jake9862h ago

Actually look at it from the other side though. If you're paying a 1.8% fee and the fund returns 6%, your net return is 4.2% after fees. The index returns 8% with no fees. So the difference between what you actually pocketed (4.2%) and what the index gave you (8%) is 3.8% every year. That's REAL money leaving your account. The fee isn't "baked in" to the underperformance because the fee is a cash expense that comes out of your return separately from the manager's bad stock picks. Like take a concrete example. She had 100k in that fund for 10 years. With the index she'd have about 215k. With the managed fund at 6% returns minus 1.8% fee she'd have about 150k. That's a 65k difference. Now if the managed fund actually returned 7.8% before fees and the fee brought it down to 6%, then yeah you'd be double counting. But we don't know that. The numbers we DO know are she got 4.2% net while the index gave 8%. That 3.8% gap is what she actually missed out on.