Library · Foundations · 7 minute read · Checked against its sources 2026-09-26
What a one percent fee costs over a working life
The fee is small. The share of your ending balance it takes is not. The arithmetic is short and worth seeing once, because after that you cannot unsee it.
Nobody ever writes a check for a fund fee. That is the whole trouble with it. It comes out of your return before the return ever reaches you, quietly, the way a slow leak takes a tire, and you find out years later by noticing that the number is smaller than you thought it ought to be. I have watched careful people, people who compare gas prices across town, hold a fund for twenty years without once asking what it charged. It is not carelessness. It is that no one made the cost visible.
The arithmetic
Suppose your investments earn 7 percent a year before costs, an example near the long run stock average, and the fund charges 1 percent, which is common for managed funds and advisers. You keep 6. On ten thousand dollars, that first year costs you a hundred dollars, which sounds like the price of a decent dinner and not worth losing sleep over. Fair enough. Now let it run. Ten thousand growing at 7 percent for thirty years becomes about $76,100. The same ten thousand at 6 percent becomes about $57,400. The fee did not take a hundred dollars. It took nearly nineteen thousand, a quarter of everything you would have had.
Put 7 percent in for r, 1 percent for f, and thirty years for n, and the expression comes out near 24.5 percent. Change the fee to a tenth of a percent, which is what a plain index fund often costs, and it comes out near 2.8 percent. The calculator linked at the side lets you set all three and see it in dollars, which is the only way most of us really believe a thing like this.
Fees stack, and that is the part that catches even people who know better. A workplace plan can carry an administrative fee at the plan level, an expense ratio inside each fund, and sometimes an adviser's fee wrapped over the whole thing. Each is quoted on its own and each is small. Added together, an all in cost of one and a half percent is not unusual, and at one and a half percent over thirty years the share of the ending balance lost passes a third.
I want to be fair to the other side of this. Some fees buy something worth having. An adviser who keeps you from selling everything in a panic has earned a great deal more than they charged. A strategy you could not run yourself may be worth paying for. The honest way to hold that is to know the dollar cost first, then ask whether what you receive is worth that number. "One percent sounds reasonable" is not a decision. Nineteen thousand dollars is.
Where the comforting explanation goes wrong
The comforting version says it is only one percent. That compares the fee to your balance, and the fee is not taken from your balance. It is taken from your return, and the return is what does all the growing. One percent out of a 7 percent return is a seventh of your growth, every single year, for as long as you hold the thing. Once you see it that way it stops looking small.
Questions worth asking yourself
What does each account you own actually cost each year, in percent and then in dollars? On your plan's menu, what is the cheapest fund that holds roughly what you want to hold? And for any fee above that baseline, what specifically are you getting for it? If you cannot answer the last one in a sentence, you have found the leak.
Sources
SEC Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio
Related
Compounding, and why the early years look boring
Funds: what you actually own when you buy one
Workplace plans: the 401(k), the 403(b), and the TSP, from the first paycheck to the last
Ask about this guide
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Written by one person and checked against the sources above; no outside expert has reviewed it yet. Rules and dollar limits change every year, so this guide explains how things work and sends you to the official source for this year's numbers.