The hidden cost of high fees: why investment expenses matter
Meet Sarah and Mike. Both started investing in their 401(k)s at age 25, contributing $500 per month. They both planned to retire at 65 and expected an 8% average annual return before fees.
But there was one major difference: the funds they chose.
Sarah chose a low-cost Vanguard Target Date Fund with an expense ratio of 0.08%.
Mike picked a “hot” actively managed fund recommended by a coworker, with an expense ratio of 0.80%.
Fast forward 40 years:
Mike lost out on $235,000.
How did this happen? Simply because he was paying an extra 0.72% in fees every year.
Investment fees compound against you, just like returns compound for you. The higher the expense ratio, the more money you give away to fund managers—money that should be working for you.
There are a few ways to avoid high fees.
A Simple Rule: A 0.8% fee might not seem like a lot, but over decades, it can mean hundreds of thousands of dollars lost. Lower fees = more money in your pocket.
Look for index funds or low-cost target-date funds.
Check the expense ratio—aim for under 0.20%, ideally below 0.10%.
Avoid funds with high turnover or “hot stock” strategies.