PocketProofAn expense ratio is the percentage of your invested balance a fund keeps every year to cover its costs, and a 1% expense ratio versus a 0.05% one can cost a 20-something investor six figures by retirement. It never shows up as a charge on your statement, which is exactly why most people with a first 401(k) have never looked at theirs.
If you just got a first job with a retirement plan, you probably picked a fund during onboarding in about 30 seconds, or got put in a default one. That's normal. But of every choice on that enrollment screen, the fee column is the one most likely to still matter 40 years from now, and you can check it today.
What is an expense ratio, in plain numbers?
Every fund, whether it's an index fund, a target-date fund, or an actively managed one, has running costs: managers, trading, record-keeping, marketing. The expense ratio is those costs expressed as a yearly percentage of what you have invested. The fund takes it out of its own assets a little at a time, so it shows up as a slightly lower return.
- 0.05% on a $10,000 balance = $5 a year
- 0.27% on a $10,000 balance = $27 a year
- 1.00% on a $10,000 balance = $100 a year
At a $10,000 balance, a $95-a-year difference doesn't sound worth worrying about. The problem is that the fee doesn't stay at $10,000.
Why does such a small percentage cost so much?
Two things stack on top of each other:
- The fee is charged on your whole balance, every year, not just on what you add. In year one, 1% of a small balance is pocket change. In year 35, it's 1% of a balance that may be several hundred thousand dollars, charged again every single year.
- Money taken as a fee stops compounding for you. The $100 you pay in year one isn't just $100 gone. It's $100 that would otherwise have kept growing for the next 39 years.
That second part is why this matters most in your 20s. Over 10 years, the gap between a 0.05% and a 1% fund on $300 a month is $2,619. Real, but not dramatic. Over 40 years, it's $179,027. The fee rate never changed. The only thing that changed is how many years it had to compound against you, and time is the thing someone starting at 24 has the most of.
The calculator: what your fund's fee actually costs
Pick a preset or type your own fund's expense ratio, then compare it to a low-cost index fund. Defaults match the worked example below.
How much will your fund's fee cost you?
Assumes the fee comes straight off your annual return (7% gross − 1% fee = 6% net), compounded monthly. Real returns vary year to year.
Quick presets for your fund (2025 averages, ICI):
The worked example, in full
Someone who's 24 invests $300 a month for 40 years, assuming a 7% average annual return before fees. Same person, same contributions, same market. The only difference is the fund's expense ratio:
The gap is $179,027. That's 23% of what the low-cost fund would have grown to, and it's $35,027 more than every dollar this person contributed over four decades combined. They didn't pick a worse market or save less. They just paid 0.95 percentage points more per year, a number most people would round to zero on an enrollment screen.
Here's how that gap builds, compared with a 0.05% index fund, for different fee levels and time horizons (same $300/month, 7% gross):
| Your fund's fee | 10 years | 20 years | 30 years | 40 years |
|---|---|---|---|---|
| 0.14% (avg. index ETF) | $256 | $1,684 | $6,361 | $19,318 |
| 0.27% (avg. target-date) | $622 | $4,079 | $15,323 | $46,281 |
| 0.64% (avg. active U.S. stock) | $1,647 | $10,652 | $39,435 | $117,309 |
| 1.00% | $2,619 | $16,720 | $61,046 | $179,027 |
Read across any row and the pattern is the same: the cost from the last decade alone (years 30 to 40) is bigger than the first 30 years combined. The fee isn't getting worse. Your balance is getting bigger, and the fee is a percentage of it.
What is a good expense ratio in 2026?
According to the Investment Company Institute's 2025 fee report (published March 2026), asset-weighted average expense ratios were:
- Index equity mutual funds: 0.05%
- Index equity ETFs: 0.14%
- Target-date mutual funds: 0.27%
- Equity mutual funds overall: 0.40%
- Actively managed U.S. stock mutual funds: 0.64%
A practical rule of thumb from those numbers:
- Under 0.10% for a broad index fund (S&P 500, total U.S. market, total world): excellent. This is what the big low-cost providers charge.
- 0.10% to 0.30%: fine, especially for a target-date fund, where you're paying a little extra for automatic rebalancing.
- 0.50% and up: needs a reason you can actually name. "It was the default" isn't one.
One counterintuitive detail from that report: index mutual funds averaged cheaper than index ETFs in 2025 (0.05% vs. 0.14%). "ETF" doesn't automatically mean cheap. Whether a fund is index or actively managed matters far more than whether it's an ETF or a mutual fund.
How do you find your 401(k)'s expense ratios?
Your plan is required to give you a fee disclosure every year (often called a "participant fee disclosure" or "404(a)(5) notice"). It lists every fund's expense ratio, usually both as a percentage and as a dollar cost per $1,000 invested. Five minutes, start to finish:
Log in to your plan
The 401(k) provider's site or app, not your employer's HR portal
Find the fund lineup
Usually "Investment options," "Fund performance," or "Fee disclosure"
Check what you own
Note the expense ratio of every fund you're currently in
Find the cheapest broad index option
Look for "S&P 500 Index," "Total Market Index," or similar
For an IRA or brokerage account, it's even easier: search the fund's ticker symbol plus "expense ratio," or look it up on the fund company's own page for that fund. It's listed near the top of every fund's summary.
What if the cheap option in your 401(k) isn't that cheap?
Some employer plans, especially at smaller companies, don't offer anything close to 0.05%. That doesn't mean skipping the 401(k). The order still holds:
- Always take the full employer match first. A 50% or 100% match is an instant return that no fee difference comes close to. A 1% fee costs 1% a year; walking away from a match costs 50-100% of that money on day one. See the investing order of operations for where the match fits.
- Inside the plan, pick the lowest-cost broad index fund available, even if it's 0.20% instead of 0.05%. You're choosing the best option on the menu, not the best option in the world.
- Beyond the match, a Roth or traditional IRA lets you pick any fund you want, including 0.05%-range index funds, at any major brokerage. If your plan's options are genuinely expensive, that's where the next dollars can go.
- If you change jobs later, you can usually roll an old 401(k) into an IRA, which takes you out of that plan's fund menu entirely.
Target-date funds: worth the extra fee?
For most people in their 20s who don't want to think about rebalancing, a target-date fund at 0.10-0.30% is a perfectly reasonable choice. You're paying a small amount for a fund that handles the stock/bond mix for you automatically. The ones to question are target-date funds charging 0.60% or more for the same job. Check the number, not the label.
Quick answers
What is a good expense ratio?
For a broad stock index fund, under 0.20% is good and under 0.10% is excellent. Index equity mutual funds averaged 0.05% in 2025 (ICI). Above about 0.50%, you should be able to name what the extra fee is buying you.
Is a 1% expense ratio high?
Yes. It's 20 times the 0.05% index-fund average. On $300 a month for 40 years at 7% before fees, it costs $179,027 compared with a 0.05% fund.
Do I pay the expense ratio out of pocket?
No. You never get a bill. The fund takes it out of its own assets, so it shows up as a slightly lower return rather than a line on your statement. That's why it's so easy to ignore.
Are ETFs always cheaper than mutual funds?
No. In 2025, index equity mutual funds averaged 0.05% versus 0.14% for index equity ETFs (ICI, asset-weighted). Index versus actively managed matters far more than ETF versus mutual fund.
New to all of this? Start with how to start investing when you know nothing about it for the full on-ramp. And if you want to see what those low-cost contributions can actually build to, our millionaire calculator runs the numbers from the other direction.
