The Expense Ratio is the most important fee to pay attention to.

Someone recently asked about the different mutual fund fees to help clarify what each one pays for. In this post, we cover the expense ratio because all mutual funds charge one.

You can find the expense ratio on your statement. You do review your statement don’t you? It may feel daunting (we understand how tempting it is shove it in a drawer for later). So let’s start small (learning is a life-long process after all) and just find the expense ratio on your statement.

Expense ratio

This fee represents a total fund’s annual operating expenses as a percentage of the fund’s average net assets. Also called Total Annual Fund Operating Expenses. As you can see in the graph below, it is actually a bunch of other fees rolled up into one. The bulk of the expense ratio covers marketing fees, which we’ll look at in more detail in a future post.

This overview, from The Retirement Savings Drain. Robert Hiltonsmith, Demos.org. shows where the expense ratio fits in the overall fee picture.

Source: Robert Hiiltonsmith, Demos.org, The Retirement Savings Drain

What’s a fair expense ratio?

As a guide, Not On My Nickel doesn’t consider any mutual fund that charges over 0.8%. All mutual funds charge an expense ratio, its unavoidable, so make sure you pay the lowest fee for the best-performing funds, like the ones we have thoroughly researched for you.

Back to your statement, is your fund’s expense ratio lower than 0.80%? If your statement isn’t handy, and you know the name of the mutual fund, use Yahoo Finance to look it up. For comparison, let’s look at BlackRock’s LifePath 2025. The BlackRock Fund has an expense ratio of 1.76%. If you have $10,000 in this fund, you pay BlackRock $176 every year! Compounded over 30 years, assuming a 6% growth rate, that’s $26,753 just in fees on this initial $10,000 investment in one mutual fund.

Source: YahooFinance.com

 What’s not included in the Expense Ratio?

Transaction fees (or trading fees) for buying and selling securities are not included in the expense ratio. That is why we only consider funds with low turnover, less than 15%, so you aren’t paying excessive fees for trading. Did you know that brokers make a profit from trading? We’ll cover trading fees in a future post.