The Real Cost of Investment Fees: How a 1% Expense Ratio Compounds Against You

What the expense ratio is

Mutual funds and ETFs charge annual operating costs, usually expressed as a percentage of the fund's assets. The SEC calls this the fund's expense ratio and says it covers the costs of managing and marketing the fund. It is typically deducted from the fund's assets before you see the return, so the performance you read is usually already net of it.

Fees have fallen a long way. Morningstar's 2026 fee study reports that the asset-weighted average expense ratio paid by US fund investors fell from 0.80% in 2006 to 0.32% in 2025\. Active funds averaged 0.57% and passive funds 0.09% in 2025\. So a 1% fee is not typical for a fund, but it is common once an advisory fee is added on top, as shown below.

Two official examples

The SEC's example. The SEC's investor bulletin on fees takes a $100,000 investment growing 4% a year for 20 years. After an annual fee of 0.25% the balance is approximately $208,000. At 0.50% it is approximately $198,000, and at 1.00% approximately $179,000.

The Department of Labor's example. Its guide to 401(k) fees takes a worker with 35 years to retirement and a $25,000 balance, with no further contributions. If investments return an average of 7% and fees reduce that by 0.5%, the balance grows to $227,000. If fees are 1.5%, it grows to only $163,000. The 1% difference reduces the balance at retirement by 28%.

We recomputed the DOL example by subtracting the fee from the annual return, and it matches: about $226,556 versus $162,846, a gap of 28.1%. The SEC figures differ by about $1,000 to $1,500 from a simple subtraction because of how the fee is applied, so we quote them as the SEC states them.

A 30-year calculation

Both examples use a single lump sum. Most people invest regularly, so here is a version that does. The assumptions are hypothetical: $10,000 to start, $500 added every month for 30 years, and a 7% average annual return before fees. Total contributions are $190,000. The fee is subtracted from the annual return.

Read the last column carefully. Of the $470,849 gained without fees, a 1% annual cost takes about a quarter. It does not take 1% of the balance once, it takes a slice of the growth every year, and each slice would itself have grown.

The gap between the 0.09% and 1.00% rows is $104,652 on the same contributions and the same market. Adding the hypothetical advisory fee on top of an average fund widens it to $136,865.

Why the effect grows with time

Two things work together. First, the fee is a percentage of a balance that rises as you save, so the dollar cost increases every year. Second, each dollar paid in fees is a dollar that stops earning returns. The longer you invest, the more years that lost growth has to compound.

That is why the same 1% looks trivial after 5 years and heavy after 30\. In the DOL example, the 1% difference reduced the final balance by 28% over 35 years.

Where the fees hide

The expense ratio is only one layer. When you compare options, ask about each of the following:

• Fund expense ratio. Find it in the fund's fee table in the prospectus and on the fund's factsheet.
• Advisory or platform fees. These are often charged as a percentage of assets on top of the fund's own fee. Our 1.32% row shows what a 1% advisory fee does to an average fund.
• Sales charges and trading costs. Check the prospectus and your broker's schedule for these.
• Retirement plan fees. The DOL guide covers the fees that apply inside a workplace 401(k) plan.

When a higher fee can make sense

Arithmetic only describes the hurdle. A fund or adviser charging 1% more than an alternative has to deliver about 1% more return every year, after all other costs, just to break even with the cheaper option. Some will, in some years. Many will not, and you cannot know which in advance. The cost, however, is certain.

What the evidence supports is a simple checklist:

This article is general information, not personal advice, and the calculations use hypothetical returns.

1. Find the total annual cost of everything you hold, including advisory fees, not only the fund's expense ratio.
2. Compare it with the passive average. Morningstar puts that at 0.09% for 2025\.
3. Multiply the difference by your time horizon. Use the table above as a template and replace the figures with your own.
4. Ask what you receive for the difference. Planning, tax work and behavioural coaching have value, but it should be priced against the sums above.
5. Revisit annually. Fees have fallen for two decades, so a product that was reasonable a few years ago may no longer be.