Understanding 401(k) expense ratios and why they matter
When it comes to saving for retirement, it's common to encounter fees, and the expense ratio is one of the most common. These fees cover costs associated with managing your investments. The expense ratio is calculated by dividing a fund’s operating expenses by the average value of its net assets.
In this article, we’ll break down what you need to know to better understand expense ratios, including:
- How expense ratios work
- How expense ratios can impact your investment decisions
- What a reasonable expense ratio looks like
- What a good expense ratio is for a 401(k)
Let’s get started.
What is an expense ratio?
An expense ratio is essentially the cost of investing in a managed fund like a mutual fund or exchange traded funds (ETF) . A mutual fund or ETF (we will just refer to both of these as “funds”) is a collection of individual assets like stocks or bonds that are managed by a fund company. Because they are already a mix, these funds help an investor diversify their investments.
It’s helpful to think of the expense ratio as the fee paid to the fund company for their management of the fund. It covers things like administrative fees, legal services, marketing and distribution costs. The expense ratio is the total of all of these fees charged by the fund.
How are expense ratios charged?
An expense ratio is shown as a percentage and is charged on your average net investment in that fund. For example, if you have an expense ratio of 0.30%, you’ll pay $3.00 annually for every $1,000 you invest in the fund.
While these fees are charged on an annual basis, you may see them appear on your account more regularly, such as on a monthly basis, depending on the fund.
What’s the difference between an expense ratio and a management fee?
As we mentioned earlier, the expense ratio is determined by the fund’s manager. For example, anyone who has a particular mutual fund may be charged a specific percentage of their assets invested in that specific fund, regardless of how, when, and where they’ve invested.
A management fee — sometimes called an assets under management fee or AUM fee — is what an investment advisor will charge for managing your individual portfolio. The more personalized and actively managed a portfolio is, the higher that fee may be.
Common management fees include:
- Investment fees: fees that are charged for investment-related services, which can include expense ratios
- Plan administration fees: fees that cover managing the account such as customer service, and participant education
- Individual service fees: additional fees charged when participants do more than basic buying and selling, such as account rollovers, or taking a loan from a 401(k)
How will an expense ratio impact my returns?
A high expense ratio can eat away at your returns long term. The more you pay in fees, the less money you’ll have invested in your account.
Since retirement investments are typically long-term investments, a low expense ratio may help you potentially grow your retirement investment by saving on fees, assuming performance is similar. Fees compound over time and can significantly impact your retirement savings.
What is a good expense ratio for a 401(k)?
Data shows 401(k) plan participants paid an average expense ratio of 0.36% in 2021. Expense ratios can vary among 401(k) providers.
At Guideline, if you’re invested in one of our managed portfolios, the average expense ratio is .07%. (Yes, you read that correctly.) With our management fees included, Guideline investors pay up to 10 times less in fees.¹
Who is responsible for choosing funds with reasonable expense ratios?
Federal law says retirement plan providers have a fiduciary duty to provide reasonably priced investment under their plans, including reasonable expense ratios. Congress created the Employee Retirement Income Security Act (ERISA) to make sure fiduciaries have strict rules of conduct, including keeping expenses reasonable, managing the plan only in the interests of participants and beneficiaries, diversifying investments and following the plan’s governing documents.
Guideline is a 3(38) fiduciary service provider under ERISA. Guideline’s investment philosophy is to minimize fees, diversify broadly and invest now with goals of long term success.
How can I account for expense ratios in my investment plans?
If you generally aim for lower expense ratios, you’ll likely pay less in fees. The money you save from not having to pay fees can potentially add up for bigger retirement savings.
Where can I find a fund’s expense ratio?
It’s important to know your plan expenses. You can find your fund’s expense ratio by reading the participant fee disclosure notice on your 401(k) statement. You can see the expense ratios for funds offered by Guideline here.
This information is general in nature and is for informational purposes only. It should not be construed as investment advice. Investing involves risk and investments may lose value. Consult a qualified financial advisor.
¹ The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book, with data updated through September 30, 2022,, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges. Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.07% of assets under management. When combined with an assumed 0.08% account fee, (Alternative account fee pricing is available, ranging for .08% to .035%), the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.15%. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup here. See our Form ADV 2A Brochure for more information regarding fees.
You should choose your own investments based on your particular objectives and situation.