The calculator
Over 30 years, a 1.00% annual fee removes $691,806, or 22.8% of what the same portfolio would have reached with no fee. In year one alone the percentage fee costs $2,500, against $132 for the flat subscription.
Figures are nominal. Enter a real return for today's dollars.
Why the number is so large
The fee is taken from the whole balance every year, and the money taken would have kept compounding. That is why 1% often costs a quarter or more of the final balance (the full study). Type your own balance into this investment calculator with fees to see the gap in dollars.
Mutual fund fee calculator: compare two funds
Mutual funds charge in more than one way: a sales load when you buy or sell, and annual costs taken inside the fund. Enter each fund's figures from its prospectus fee table to see what you pay, and what those payments would have grown to.
Over 25 years, Fund A's loads and annual costs take $45,091 and cost another $45,859 in growth those dollars would have earned. Fund B takes $2,122 and $1,669. The 12b-1 fee is part of the total expense ratio a prospectus shows, so if you copy that total, set 12b-1 to zero.
Mutual fund fees explained
Fund costs come in two kinds. Transaction fees are charged when you buy or sell. Ongoing fees are charged every year for as long as you own the fund, which is why they matter more over a long holding period.
- Expense ratio. The fund's annual operating cost as a percentage of your balance, covering management and administration. It is deducted inside the fund, so it never appears as a bill: you see it only as a lower return.
- 12b-1 fee. An annual marketing and distribution fee, named after the SEC rule that allows it, and included in the total expense ratio. FINRA caps it at 1% a year.
- Front-end load. A sales charge taken from each purchase, typical of Class A shares. With a 5.75% load, $10,000 buys $9,425 of the fund. Larger purchases often qualify for lower rates at breakpoints.
- Back-end load. A contingent deferred sales charge taken when you sell, typical of Class B and C shares. It usually shrinks each year you hold the fund and reaches zero after a set period.
- Other fees. Redemption fees for selling soon after buying, exchange fees, purchase fees and account fees. The prospectus fee table lists all of them.
- No-load funds. Funds with no sales charge on purchase or sale. They still have an expense ratio, and some still charge a small 12b-1 fee.
On top of the fund's own costs, an advisor may charge an AUM fee on the account. That is the figure the first calculator on this page handles; add the expense ratio to it for the total.
Index fund vs actively managed fund: an example
The defaults compare two funds earning the same 7% before costs, with $10,000 invested and $500 added every month for 25 years. Fund A is an actively managed fund sold with a 5.75% front-end load and 1% a year in costs (0.75% plus a 0.25% 12b-1 fee). Fund B is a no-load index fund or ETF at 0.05% a year, a level many broad index funds charge.
Fund A ends at $357,059 and Fund B at $444,218, a gap of $87,158. Fund A's fees paid come to $45,091, and the growth those fees would have earned adds $45,859 more. For the active fund to break even, its manager has to beat the index by about its extra costs every year, after the load, for 25 years. Most active funds have not managed that over long periods, which is the main argument for low-cost index funds.
Working the fee out by hand
Investment management fees are quoted as an annual percentage of assets and usually billed quarterly, so the arithmetic for one year is: multiply the balance by the annual rate, then divide by four for each quarterly bill. A 1% fee on $250,000 is $2,500 a year, billed as four payments of $625. Add the funds' own expense ratios, which are deducted inside the fund rather than invoiced: a 0.20% ratio on the same balance is another $500, so the total cost is 1.20%, or $3,000.
Repeating that for a second year is where the headline rate stops telling the truth. The fee is charged on the new, larger balance, and the dollars taken in year one are no longer compounding. That second effect is most of the gap after a couple of decades, which is why the total above is far more than the annual rate times the number of years.
Flat fee vs a percentage
A percentage fee grows as you succeed. A flat fee does not. With the figures above, the percentage costs $2,500 in year one and more every year after; the flat subscription totals $3,960 over 30 years. See AUM fee.