Published: Wednesday, April 9, 2026 Series: The Blueprint | Practical Investing Guides
You own a fund that you've held for 15 years. You don't remember exactly why you bought it — it was probably a default option when you started at your employer, or something a financial advisor recommended before you learned to do this yourself. It's been fine. It's been there. It's done okay.
You've never looked up what it costs.
If you pulled up the fund's fact sheet right now, you'd find a line item called the expense ratio. It would be a small number — maybe 0.87%, maybe 1.05%, maybe 1.20%. It looks trivial. You're paying less than 1% a year. That's essentially nothing, right?
Except you've been paying it for 15 years. And it's costing you far more than nothing.
What an expense ratio actually is
An expense ratio is an annual fee, expressed as a percentage of your assets under management. When a fund charges a 1.0% expense ratio, it means you pay 1% of your balance to the fund company each year, whether the market is up or down.
In Issue #2, we looked at the difference between index funds and actively managed funds. Index funds are cheap to run — they hold everything in an index, no research team, no trading desk — so they charge low fees. Actively managed funds employ portfolio managers, research analysts, and trading teams who are supposedly earning their keep by outperforming the market. That costs money. That's where the high expense ratios come from.
Here's the critical part: you pay the expense ratio regardless of whether the fund performs well.
If your actively managed fund beats the market by 2%, and its expense ratio is 1.0%, the net result is that you earned 1% more than the market after fees. But if it underperforms by 0.5%, your actual return is negative 1.5% relative to what you could have earned. You're paying for outperformance, but getting no guarantee of it — in fact, the historical odds are stacked against it.
The math that will change how you look at your portfolio
Here's a concrete example. You have $200,000 in a retirement account. You're planning to hold it for 20 years.
Assume an annual return of 7% — this is historically reasonable for a stock-heavy portfolio. Now imagine two scenarios:
Scenario A: Low-cost index fund (0.04% expense ratio) - Net annual return: 7% − 0.04% = 6.96% - Year 1: $200,000 × 1.0696 = $213,920 - Year 5: $200,000 × (1.0696)^5 = $279,986 - Year 10: $200,000 × (1.0696)^10 = $391,962 - Year 20: $200,000 × (1.0696)^20 = $768,171
Scenario B: Actively managed fund (1.00% expense ratio) - Net annual return: 7% − 1.00% = 6.00% - Year 1: $200,000 × 1.06 = $212,000 - Year 5: $200,000 × (1.06)^5 = $267,645 - Year 10: $200,000 × (1.06)^10 = $358,170 - Year 20: $200,000 × (1.06)^20 = $641,427
The difference: $126,744 — over 20 years — from a difference of 0.96 percentage points in annual fees.
That's not from better or worse market returns. That's not from stock picking or luck. That's from the fee alone, compounding at the same rate your portfolio is supposed to compound.
Let me say it another way: if you own a single 1% expense ratio fund instead of a 0.04% fund, the fund company is going to take roughly $127,000 of your retirement money that could have been yours.
Where the really high fees hide
When you look at a 401(k) fund menu, the funds with the highest expense ratios usually aren't labeled as such. They're dressed up as solutions. "Target-Date 2050." "Lifestyle Balanced." "Managed Growth." "Tactical Allocation."
Some of these — actual target-date funds — are legitimate low-cost options that we covered in Issue #2. But many are what's called "managed accounts" — portfolios that are actively managed by a professional firm, that make tactical allocation decisions, that shift between asset classes based on their market forecasts. Some of these charge 1.00%, 1.25%, or even higher.
The appeal is obvious. You're paying for expertise. Someone is managing it for you. You don't have to think.
But here's what the data shows. Every year, S&P Global publishes the SPIVA report — a thorough comparison of professionally managed funds against their benchmarks. Over 15-year periods, roughly 85% of actively managed US large-cap funds underperform a simple index. Over longer periods, this gets worse, not better.
That 1.25% fee you're paying for active management isn't buying you better returns. It's buying you worse returns, with the fee guaranteed and the underperformance consistent.
A term you'll see everywhere: basis points
Before we go further, here's a term that's baked into every financial conversation and rarely explained.
One basis point = 0.01%.
One hundred basis points = 1%.
So when someone says "this fund costs 25 basis points," they mean 0.25%. When they say "85 basis points," they mean 0.85%.
Why use this term? Because in the world of investments, fractions of a percent matter enormously. Saying "this fund is 25 basis points cheaper" feels more precise than saying "it's 0.25% cheaper." The terminology makes the small differences feel important — because they are.
Low-cost index funds typically run 3–25 basis points (0.03%–0.25%). Actively managed funds typically run 65–120 basis points (0.65%–1.20%). Target-date funds typically run 10–50 basis points (0.10%–0.50%).
If you see a number expressed in basis points and want to convert it mentally: just move the decimal two places. 85 basis points = 0.85%.
The obvious thing you probably already missed
Here's the part that hits Marcus hardest.
Most people who discover they have a 1.0% expense ratio fund have held it for years. Sometimes decades. They didn't realize it was costing them anything, because no one sits you down when you enroll and says, "This fund costs you roughly $1,000 a year on a $100,000 balance."
Instead, you see a fund, it has a professional name, it's the default option, you choose it. Years pass. Your balance grows. The cost grows too. You never get a bill. You never see the money leave your account. The fee just silently compounds, every year, in the direction opposite to your wealth.
By the time you find out — if you find out — it's too late to recover the years you've already paid. What you can do is stop the bleeding for the next 20.
What to do with high-cost holdings you already own
If you discover you've been holding a 1.0%+ fund, here's the straightforward strategy:
In a 401(k) or IRA: You can switch funds with no tax consequences. Selling one fund and buying another inside a tax-sheltered account is not a taxable event. Log in, find the exchange or transfer function, and move the money to a low-cost index fund with an expense ratio under 0.10%. The money moves, usually within a business day. That's it. The years you already paid are gone, but you stop paying going forward.
In a taxable brokerage account: Selling an appreciated fund creates a capital gains tax event. If you have large gains, paying the tax to switch into a low-cost fund is sometimes still worth it — the years of fee savings outweigh the one-time tax hit. But you need to do the math. A tax professional can help with this calculation.
The core principle: A year of paying 1% when you could be paying 0.05% is a year of lost compound growth that you'll never get back. The cost of switching is real and concrete. The cost of staying is also real and concrete — it's just spread across 20 years and therefore easier to ignore.
One action this week
Log in to your 401(k), IRA, or brokerage account. Find your three largest fund positions — the ones holding the most money.
For each one, look up the expense ratio. You can find it: - In the "Fund Details" or "Fact Sheet" section of your brokerage portal - By searching "[Fund Name] expense ratio" in Google - On Morningstar.com or Yahoo Finance
Write down the three numbers.
Here's what you're looking for: - Anything under 0.20% — good. You're in the low-cost range. - Anything from 0.20% to 0.50% — acceptable, but there's usually a cheaper alternative. - Anything above 0.50% — pay attention. You're probably paying for active management that, statistically, isn't earning its keep.
You don't need to make any changes yet. The goal this week is just to know the number. Next week, you'll learn which accounts to use and in what order — and it turns out, the account you're saving in matters almost as much as the fees you're paying in it.
Next Wednesday: You have a 401(k), maybe an IRA, maybe a regular brokerage account. The order matters. Here's which one to fill first — and why filling them in the wrong order could cost you tens of thousands in taxes over your lifetime.