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Understanding and Avoiding Mutual Fund Fees

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Every now and again, I wonder if I'm writing at either a level that is too personal. One one hand, I believe that some of the reason people ready Lazy Man and Money is because of the personal focus. On the other hand, even I have to admit that my life isn't that exciting. It feels like I'm walking a fine line sometimes.

I've also been wondering if I've presumed too much financial knowledge of my readers. I was looking through some of my old posts and I realized that I have no "mutual fund" category. I couldn't believe that in over 5 and half years of personal finance posts I haven't written one post around mutual funds. It doesn't feel like it can be true, but unless I miscategorized a bunch of posts (which is always possible), it is. It's a little like teaching someone the fundamentals of quartberbacking in the NFL and excluding the screen pass.

I think the reason why I haven't touched on mutual funds in the past is that I focus most of my investing in exchange traded funds (ETFs). In many ways, they are like mutual funds, but they are traded on stock exchanges, and in many cases, but not all, have lower fees. Also, they are relatively easy to understand. You typically pay a broker commission (usually under $10) to buy the ETF. The rest of the fees are built into the stock price and you can look up the expense ratio information for that. That's information for another article. Today I'd like to talk about mutual fund fees.... particularly understanding and avoiding them. It's time to cover some of the basics. Please bare with me, I'm not in the financial industry and I may gloss over minor details.

One of the differences with mutual funds is that the terminology is a little more difficult - at least for me. For example, you have load and no-load funds. A load in the mutual fund context is another word for fee. Typically, there are front-end loads, which means that you pay when you buy the fund. Sometimes they are just a percent or two, but when you are investing $10,000 (as in rolling over a 401K to an IRA) that translates to "just" a $100 or $200. It's not so minor a detail now is it? Additionally some mutual funds charge back-end loads, or to make it more confusing, something that is often called a deferred sales load. These are fees that are charged will you sell the mutual fund. Sometimes if you hold the fund long enough, the fees are waived.

If that last paragraph was confusing, you can simply do what I do, look for mutual funds that are marked "No-load." There are a lot of them available. Since basic index funds (an automated average of a large group of funds) typically outperform a majority of mutual funds, I really don't believe in investing in any mutual funds that charge a load.

Just because you've avoided paying a load doesn't mean that you've escaped paying fees. The mutual fund companies have to make money somehow, right? And we know most of the people Wall Street aren't exactly poor. The other major form of mutual fund fees is called an expense ratio. Just like the ETF version, this is a percentage of money that is used to run the fund. This includes paying fund managers as well as advertising the fund, and probably a bunch of other small things in there that aren't really important for you or I to understand. Just like the load, this is a percentage and in our mythical $10,000 investment the 1% or 2% comes out to $100 or $200... but it's charged every year. It's really important to keep this fee in check.

Expense ratios can vary widely. In my wife's Thrift Savings Plan (like a 401k for the military folks) the expense ratio is 0.025% or $2.50 for a $10,000 investment. That's as good as you can get. On the other of the spectrum, it took me about an hour of searching, but I think the highest expense ratio is the 9.72% one from Giordano Fund. That will cost you nearly a thousand dollars of your 10,000 investment - each year. This is an extreme case that you typically won't find.

I'll leave it up to you to do find the mutual funds that fit your goals. To push you in the right direction, I'll offer you this stock screener from Yahoo.

Posted on December 13, 2011.

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17 Responses to “Understanding and Avoiding Mutual Fund Fees”

  1. Good post. The reality of fees is that they just keep eating away at your portfolio year in and year out. Here in Australia, it is very difficult to buy a mutual fund (known as a managed fund) without seeing a financial adviser. To make matters worse, they then sell lots of mutual funds and to manage the complexity, they sell a wrap account that administers all of these funds. You’ve guessed it, even more fees.

    I calculated that the typical Aussie investor can easily pay $350,000 of fees on a $200,000 investment over 20 years!

    I’m sure it could catch on over there, if it hasn’t already started!

    • Lazy Man says:

      Yikes $350,000 of fees on a $200,000 investment over 20 years?!?! That doesn’t seem possible does, it?

      Wait, I just did some rough math and if the fees are 3% you would indeed pay $361,222 in fees over 20 years on $200,000. Someone want to double check?

  2. Todd says:

    Good stuff, LM. I’d like to read your thoughts about online brokers.

  3. Sun says:

    Can you explain how one goes about investing in mutual funds? I gather they can be purchased as pre-tax (401k or 403b) or after tax via a discount broker? I tried to buy VFORX from my SEP-IRA and Charles Schwab wanted $50 for the trade. Would this be the brokerage fee separate from the load?

    • Lazy Man says:


      I have had a dozen online brokers, but most of them in an embarrassing day-trading phase around 2000. I’m currently consolidating those accounts to USAA. Not everyone is eligible for USAA (you usually have to have some kind of relative in the military), but for those who are I have had the best customer service and the fees are competitive. For the average investor that’s pretty much all you need.


      I talked to Schwab and got the low-down on VFORX for you. My wife actually had a similar response from USAA when she tried to invest in one of Vanguard’s Target Retirement Funds. The customer service person said that the fees are now $76 and that they have an agreement with Vanguard to pass that on to them. The person also mentioned that they have thousands of funds that have no such fees – in their OneSource collection. One similar fund I found was SWERX, Schwab’s own target retirement fund. It has a net expense ratio of 0.83%. That’s a little high for my liking, but target retirement funds usually have a premium on them, because they are a collection of other funds (management fees on top of management fees).

      This is one of the reasons I stick to ETFs. While I do have to “actively” manage the funds, I can get Vanguard’s Total Market Index (VTI) for a 0.06% expense ratio, plus the one-time commission fee of $9. There’s another hidden “fee” in buying an ETF – the difference between the ask and the bid price. In VTI it is usually just a penny, meaning that if you bought and sold 1000 shares (that’s investing over $60,000 today), I’d lose $10 in that difference. It’s a drop in the bucket for VTI, but it can be more for other exchange traded funds.


  4. Re Comments 1 and 2. The $350,000 of fees is a total of annual fees at 2.55% with the investment growing at a gross 8%. The articles
    Financial Adviser Fees – The Cold Hard Facts is linked below. Happy for anyone to test the calculations. Very scary but quite common here in Australia to see these type of fees.

    It’s a combination of mutual fund fees (managed funds), the administration platform (Wrap account) and the fee charged by the financial adviser.


  5. Steve says:

    In the article linked, the “fees” are calculated as the difference between what you end up with after 20 years vs. what you would have had in a hypothetical, zero fee situation. The actual total of fees “only” 186k
    in nominal dollars. Also by that time the account has grown to $560k (after fees) so it’s not quite true that you paid more in fees than the account is worth. Though almost a third of the gain does go to the recipient(s) of the fees (2.55% out of a hypothetical 8% return) which is rather outrageous. Especially considering they are not the ones taking the risks of investing! A “heads I win, tails you lose” situation.

  6. Evan says:


    You missed C Shares with a lower fee but higher expenses.

  7. Sun says:

    > I can get Vanguard’s Total Market Index (VTI) > for a 0.06% expense ratio, plus the one-time
    > commission fee of $9

    I think my VFORX is 0.17%. So, for every $10,000, I pay $17 in fees each year. Yours would only be $6. Doesn’t seem like a big difference once you factor in the trade commission.


    Should I look into changing my 403b from VFORX to VTI to avoid paying the trade commissions but have a lower expense ratio?

    Also, what is involved in actively managing? Would this be re-distributing to keep the portfolio percentages the same?

    • Lazy Man says:

      The $17 vs. $6 isn’t that big of a deal. I personally didn’t like the $76 charge to buy in. On $10,000 it’s not that much, but I don’t know how much you really are investing. If you are trying to invest $2000 it becomes quite significant.

      I can’t give you personalized advice such as whether you should change your allocation in your 403b. I’m not a financial advisor and I don’t know how fees are structured in your 403b. If you are dealing with large numbers like $10,000 it’s probably not a big deal and I imagine the peace of mind of having a retirement fund may be worth it.

      As far as actively managing, yeah it would mean to keep redistributing to keep the portfolio percentages the same. I’m not a big believer in there being a magic percentage of everything. I’m okay if something I’m 55% international stock and 45% domestic stock vs. 60% international and 40% domestic (as an example). When I’m investing new money, I tend to look to balance those things out. So if things have moved in the last year, I’ll just add more money to the lower percentage… especially because it is now likely “on-sale” compared to where I bought it before.

  8. Sun says:

    I see schwab has a vti equivalent called schb. They said no trade commission fee to buy that since I have a schwab account. Expense ratio is 0.06% so that’s even better than vti. :) I’m investing small amounts now since we still have debt, but we hope to ramp it up after that’s out of the way.

    • Lazy Man says:

      I think VTI’s is 0.06% as well, so if you are saying that 0.06% is better than 0.06%, then okay I’ll believe you ;-). If you are investing on a regular basis, you might find that you can get in a mutual fund that will waive fees as long as you have an automatic deposit. That cuts down repeated commissions. Also look into those OneSource funds that cost nothing to buy into.

      Not much worse than trying to invest $50 a month and paying a $10 commission to buy-in ;-).

  9. LaTisha says:

    I became a mutual fund investor for the first time this year in my company’s 401k. The mutual fund fees seem a little expensive for what they do but hey, I’m all for the matching contribution from my employer.

  10. Sun says:

    > OneSource

    Expense Ratios are a bit high. I like the ETF alternative… much lower expense ratio.


    I like efficient rates. :)

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