Understand Expense Ratios To Help Maximize Your Retirement Savings

A mutual fund expense ratio is a critical metric to understand when managing a workplace retirement account. It represents the annual fee that a mutual fund charges its investors, expressed as a percentage of the fund’s total assets. This fee covers the operational costs of the fund, such as management fees, administrative costs, and other expenses like marketing or distribution (sometimes referred to as 12b-1 fees).

In a workplace retirement plan, where mutual funds are common investment options, the expense ratio directly affects your investment returns. For example, if a fund earns an annual return of 8% and has an expense ratio of 1%, your net return is reduced to 7%. Although this may seem minimal, the cumulative impact over decades of investing can significantly reduce your retirement savings due to the compounding effect of costs.

A Positive Trend

According to the Investment Company Institute, mutual fund expense ratios have decreased by 60% since 2000. They report that fund providers have continued to lower fees to stay competitive. In addition, older workers invested in funds with higher expense ratios have been retiring and withdrawing their cash from their workplace retirement plans. At the same time, younger workers entering the plans tend to choose lower-cost mutual funds to help keep more of their money. The cycle repeats, and this drops the average mutual fund management fees that investors pay.

Doing Your Homework

Expense ratios can vary widely depending on the type of mutual fund. Actively managed funds (which aim to outperform the market) typically have higher expense ratios. Index funds or passively managed funds (which track a market index) often have lower expense ratios. When choosing funds for your account, cheapest isn’t necessarily best. Evaluate whether the fund’s historical performance justifies its costs and aligns with your retirement goals. Here are two good sources of information on your plan’s investment offering:

• Your employer’s summary plan description. Most employers provide a summary plan description for their retirement plans, which includes detailed information about investment options and associated expense ratios. In addition, your annual plan fee disclosure document outlines all the fees related to the plan, including fund-specific expense ratios.
• Fund provider websites. Websites of mutual fund providers offer detailed expense ratio data for their mutual funds. Look for the fund’s prospectus or fact sheet, which breaks down fees and performance.

Informational Sources: Investment Company Institute: “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2023” (July 2024); Bankrate: “What is an Expense Ratio and What’s a Good One?” (October 2, 2024).

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. HUB Retirement and Private Wealth employees are affiliated with and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, some of whom may or may not be affiliated with HUB International. HUB International owns the following Registered Investment Advisers: HUB Investment Partners; HUB Investment Advisors; GRP Financial; RPA Financial; and Taylor Advisors. Additional information for each individual HUB International Registered Investment Advisor may be found in the respective Form ADV available on the SEC’s IAPD website at https://adviserinfo.sec.gov. Insurance services are offered through HUB International. RPW-444-0525