Glossary
Expense Ratio
The annual percentage of your money a fund charges for management — a cost that compounds against you over decades.
An expense ratio is the annual fee a fund charges, expressed as a percentage of your money invested in it — 0.05% means 50 cents per $1,000 per year; 1% means $10. It’s deducted invisibly from the fund’s returns rather than billed, which is precisely why most investors never feel it.
The damage is compounding in reverse. Two funds earning identical 7% gross returns, one charging 0.05% and the other 1%: on $100,000 over 30 years, the cheap fund grows to about $748,000, the expensive one to roughly $572,000. The 0.95% difference consumed about $176,000 — more than the original investment — without a single line item ever appearing on a statement.
Benchmarks for judgment: broad index funds now charge 0.02–0.10%; target-date funds commonly 0.10–0.75%; actively managed funds often 0.5–1.2%. Above 1%, a fund needs to beat the market by its own fee every single year just to tie — which decades of data show few reliably do.
Where to check: every fund publishes it on its fact sheet, and your 401(k)’s plan documents must disclose it. Comparing the funds in your plan by expense ratio takes ten minutes and is among the highest-paid work you’ll ever do.
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