How To Reduce 401K Fees Through Portfolio Analysis

Do you know how much in mutual fund fees you are paying a year? I didn’t, so I ran my 401K portfolio through Personal Capital’s 401k fee analyzer and I’m absolutely shocked by the results! I always figured that from a percentage point of view, my mutual fund fees were small. But, when you take a small percentage multiplied by a big enough number, the absolute dollar amount starts adding up.

401K Fees Add Up!

As you can see in the picture above, I’m paying $1,748.34 a year in fees across four mutual funds. In 20 years, I will have paid roughly $84,000 in fees based on only this amount. The second portion of the above chart shines a light on the specific fund that costs the most. In my case, it is the Fidelity Blue Chip Growth Fund with a 0.74% expense ratio.

I’ve got another fund worth about $22,000 as part of my 401K which does not show a fee, because it is a hedge fund whose fees are baked into the performance. Typical hedge fund fees are 2% of assets under management and 20% of upside. This is called 2 and 20, which is egregiously high, but it’s the only way I can get short exposure to hedge my bets.

I’ve been wanting to do a 401k/mutual fund fee analysis for the longest time, but was too lazy to do the analysis until I realized I didn’t have to do the calculations myself. Every year I want my portfolio to be as optimized as possible.


* Huge spread in expense ratios. The cheapest expense ratio is 0.19% for the Vanguard IT Index Fund and a whopping 0.74% for the Fidelity Blue Chip Growth Fund. 0.74% is almost 4X greater than 0.19%, supposedly because they’ve got to pay the fund manager and analysts for providing alpha and outperforming the S&P 500 index. If the fund manager(s) can indeed outperform the S&P 500 index by more than 0.5% a year, then their fee is on par with my cheapest Vanguard Index Fund. If not, I’m wasting my money.

* Fees add up over time. In 20 years, I will have paid ~$87,000 in mutual fund fees if I keep my existing portfolio. I don’t know about you, but that seems a lot, even if my 401k does grow to $1,500,000 as my 401K savings guide estimates. Just doing the math here, 67% or $58,290 of the $87,000 in fees will come from my Fidelity Growth Fund alone. Meanwhile, the Fidelity growth fund only accounts for 39.5% of total assets. Long term growth has a way of compounding into great returns for consistent investors and savers, however it sure does a number on the total amount of fees as well.

* Understanding tax cost ratio. The Tax Cost Ratio measures how much a fund’s annualized return is reduced by the taxes investors pay on distributions (relevant for non-tax advantaged accounts). The range is usually between 0%-5%, the lower the better. For example, if a fund had a 1.5% tax cost ratio for the three-year time period, it means that on average each year, investors in that fund lost 1.5% of their assets to taxes e.g. a 10% return is really only a 8.5% return. It’s good to see my highest fund with a 0.74% expense ratio have only a 0.11% tax cost ratio! One can simply combine the two to figure out their total expenses. The Fidelity Growth Fund is therefore 0.85% vs. 1.94% for the Vanguard Precious Metals fund! The Vanguard IT Fund is the lowest 0.31%.

* Big fan of index funds. The Vanguard family of funds have some of the lowest, if not the lowest fees in the mutual fund industry. The reason is because of their scale and also because they run passive index funds. There’s no team of analysts to pay. There are no business trips to expense to go kick the tires of the companies they hold. The index is rebalanced usually once a quarter, or whenever there is a big index addition or subtraction to reduce variance risk. Three out of four of my funds are by Vanguard. After I finish typing this post, all of my funds will be by Vanguard!

* You can create a portfolio of index speciality funds. About 60% of my entire 401K allocation is invested in three speciality index funds: Energy, Metals & Mining, and Technology. If I wanted, I could create a portfolio of 20 speciality index funds if I wanted to. In other words, you don’t have to buy one fund that asset allocates across the industrial board. If you have conviction in particular industries which you think will outperform, there is an index fund for you. We can discuss investment decisions in a future post.


This is the chart that really kind of makes me sick. Let’s say I continue to max out my 401K like I have been doing for the past 13 years, get a full employer match (I was getting more due to profit sharing), and assume an annualized return of 5.8%. After 30 years, I will have paid $489,014 in fees and lost out on 2 years worth of retirement income!

The funny thing is, my blended expense ratio is 0.43% compared to Personal Capital’s target benchmark of 0.5%/ The public is paying a tremendous amount of mutual fund fees over our lifetimes, and we don’t really know it until we do the analysis. To put it differently, if you want to make big bucks in your life, you should consider a career in money management. It’s all about leverage. A fund manager can run $1 billion dollars under management as easily as he can run $10 billion dollars under management.

401K Lost Performance


It’s important to not only look at the expense ratio, but also the tax cost ratio to see how much your performance is getting reduced by each year. Look to invest in lower cost index funds or ETFs instead of actively managed funds who have shown a poor track record of performance. There are plenty of studies showing that the large majority of actively managed funds underperform their benchmarks.

Personal Capital helped me realize that I am paying at least $1,700 more a year in mutual fund fees than I should be paying thanks to the Fidelity growth Fund. I’ve simply swapped the fund out for the S&P 500 ETF, SPY, which costs hardly anything to own.

I wouldn’t have been able to see what an outlier the fee is without the 401K fee analyzer that aggregates all the data and provides a side by side comparison. Not bad for a free online financial management huh? I suggest everybody take a hard look at their finances to see where they are paying unnecessary fees.

Step By Step Instructions To Reduce 401K Fees

If you want to figure out how much in fees you are paying in your 401K, do the following:

1) Spend one minute to sign up with Personal Capital. It’s free and secure.

2) Click the “+” button on the top left to add/link an account. For my Fidelity hosted 401K, I typed in the search box “” since the Fidelity pre-populated button just linked to my Fidelity rollover IRA.

3) After your 401K account is linked, click the “Investing” tab on the top right then choose “401k Fee Analyzer”

4) Adjust your contributions, estimated returns, employer match, and estimated future fees to get an idea of how much you could have in your investment portfolio over time.

5) Research alternative ETFs and index funds that can replace your expensive actively managed funds. Figuring out the proper equity exposure is the most important part of your retirement planning. I encourage you not to waste time trying to pick stocks or trade in and out of sector ETFs. Instead, focus your on things you can better control or enjoy.

About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.

Updated: 2H2015. The maximum contribution to your 401k is now $18,000 from $17,500 in 2014. Make 2015 the year where you max out your 401k and minimize your investment expenses!

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

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  1. Mike Hunt says


    By your own calculation on what should be in a 401K, do you measure yourself as being behind or on track?

    Great analysis of fees- they really do add up!


    • says

      Mike, based on my 401K savings guide, I’m on track. However, there is a fear I will fall behind as I focus on my online entrepreneurial endeavors. However, I hate paying taxes, so will continue maxing out in an individual 401K and/or SEP-IRA.

      The 401K is a woefully light instrument for achieving financial freedom due to the contribution limits, but we’ve got to make due with what we have and optimize. We’ve got to also focus on our after tax savings, investments, and alternative income streams for the now.

      Individual 401(k)s: Also called “solo” or “one-participant” 401(k)s, they are available to free-lancers, independent contractors and sole proprietors. as well as business owners with no employees other than a spouse. Since you are both the employer and the employee, you can contribute to the plan in two ways. As an employee, you can contribute up to 100% of your compensation, up to a limit of $17,000 in 2012, plus a catch-up contribution of $5,500 if you are at least 50 years old, for a total of $22,500.

      As the employer, you can contribute up to 20% of your self-employment earnings—or 25% if your business is incorporated, says John Heywood, a principal at Vanguard Group’s retail-investor unit.

      In 2012, total contributions from both employer and employee can’t exceed $50,000, or $55,500 if you are 50 or older.

      SEP-IRAs: Simplified employee pensions are often called SEP-IRAs, because your contributions go into an IRA. You can contribute up to 25% of your net self-employment income, up to a maximum of $50,000 in 2012. Contributions are deductible as a business expense.

  2. John says

    Tax Cost Ratio has more meaning for accounts that are taxable (in the current year), correct?

    I.e., in a 401k, it has much less (or no) impact…

    • says

      Excellent question. There is no avoiding taxes. Each investor will have to pay sooner or later. The tax cost ratio, the higher it is will drag down performance.

      The good news for investors in accounts such as a 401(k), 403(b), or IRAs is that all taxes are deferred on the capital gains distributions paid by funds held within these accounts. If you hold mutual funds within a tax-deferred account, the tax efficiency of your funds is not strictly a concern.

      Does this mean investors should be indifferent to high turnover rates for funds held within their tax-deferred accounts? No. High turnover rates will still present a drag on a fund’s annual returns because of the trading costs of buying and selling often. As noted before, the drag on an average managed mutual fund with 85% turnover is approximately 0.7% per year.

  3. says

    Another blogger recently talked about calculating the MERQ, which is the total returns you will lose over a quarter-century (25 years). When you look at it that way, anything with a fee of 2%+ is making more money for the manager than it is for you. Even a low fee can add up but it’s better to lose 10% of your portfolio than 75%!

    The Personal Capital chart sounds similar to that. It would be useful if they showed the total returns you would get over 20 years with and without fees. But I guess that requires estimating the actual returns and that can be dangerous. Maybe they could just let you put in your expected returns.

    Turnover can be a warning sign too. It looks like the Fidelity managers decided that 95% of their choices last year were bad. Fortunately they didn’t generate a lot of tax by selling the entire portfolio in 1 year since they must have picked a lot of losers. The chances that they will earn their fees in the future seem low… let’s call it 0.74%.

    • says

      Thanks for bringing that up. Personal Capital does have a pro forma analysis tool, which I’ve added to the post in the second chart. It’s always good to play around with the numbers and see!

      • says

        They’ve really done that well. Hopefully people learn from lessons from it. There is a downside though. I was talking about this with my friend who is a financial advisor and he agreed that it makes the high-fee funds look terrible (if you threw in the additional 1% in fees you would end up with a lot less) but even a reasonable fee can look pretty big as you showed. In the end you have to pay to play!

  4. Rav says

    Thanks for posting this article. I was getting a bit concerned with the way I’ve been managing my accounts. But, I reviewed how well my portfolio has done compared to my friends who pay for active management ( about 15 friends ). My returns have beaten all but one.

    I’m 38 years old and I’ve saved the following amounts:

    290K – Before Tax 401k
    112K – Roth 401k
    402K – Total in Tax deferred Accounts

    I’m a conservative investor that follows the philosophy of Jack Bogle. My overall portfolio has returned 6.4% since 1998. I invested in primarily low cost index funds. I have a 50% stock ( Vanguard Total Stock Market Index fund, Total International Index Fund ) with 50% bond asset allocation ( Vanguard Intermediate Bond Fund and Vanguard TIPS fund); I use very cheap index funds with my portfolio. Based on my portfolio predictions, I should’ve earned 8.1% return but stocks have not returned what they were supposed to. Based on what i’ve read and research, the bond portion of my portfolio should not do as well the next 10 years. So, I’m going to slightly increase my stock allocation. I rebalance my allocation once a year and review my returns quarterly.

    I plan to be a bit more aggressive and use a 60% stock and 40% bond allocation for the next 10 years ( 2013 – 2023 ). My goal is to save 58% of my income after taxes which is about 8K per month. I plan to semi-retire at 50 and become a part time teacher; I enjoy teaching but the pay is not that good.

    • says

      Nice work on the savings Rav! With a 58% after tax savings rate for the next 10 years, there’s no doubt I think you will get to semi-retirement at age 50. This is what Financial Samurai is all about. Reaching financial independence sooner, rather than later!

  5. Dan23 says

    You are probably aware of this, but your fidelity fund would have to beat the s&p by a number greater than the difference between the two fees since the fidelity fund has a beta greater than 1 – even if the fidelity fund had excess returns some of it would be due to beta which you should not be paying for (or should be paying much less for than additional returns due to alpha).

  6. says

    Last year, I learned that my 403B fees were outrageous! At first, the fees were small because it was a percentage. I asked some pointed questions and was able to reduce the fees to $1 per month with just a little work on my part. I have to manually transfer my contribution from my money market account to a brokerage account, but it beats a percentage fee. As my balance keeps growing I certainly did not want to pay a percentage fee.

    • says

      Nice work Larry. That’s the thing. Everybody just happy go luckily goes along and pays whatever, not noticing the drag along the way. Once they run their 401k through something like Personal Capital” target=”_blank”>Personal Capital’s 401K Fee Analyzer, folks wake up!

      Fees add up over time!

  7. Brett says

    EXCELLENT analysis Sam! Personal Capital makes the ability to analyze so much easier with their 401K analyzer. I’m doing the same exercise myself now and am noticing some inefficiencies in my portfolio as well. I have too many funds (12) which aren’t focused on my risk parameters.

    I recommend everybody check out Personal Capital as well. Great tool for building wealth because you know where your money is going!

  8. says

    Those are cool graphs. I’ve never done that type of analysis with my funds. I like how they make it so easy to see and compare. I’m so glad I started contributing to my 401k when I did too because the money really adds up, especially with company matching. I like how Personal Capital lets you log on in one place and see everything, not just 401k.

  9. Sarah says

    Thanks for the tips Sam! What I really enjoy about your posts is how you add your own portfolio/situation to it, offer your opinion and advice, and provide a solution.

    I read other PF blogs where it is obvious the writer has never used the product. I’ll be looking at my 401k to gear up for the new year!

    • says

      You bet Sarah. I write what I know and feel. If I don’t know something, I’ll say it, or I just won’t bother to write. I think it’s important to write from our knowledge, not from only pontification.

  10. Brendan says


    This is really great stuff! I tend to think of my fees as negligible when they are <.75%, but this graph really shows you how 401k fees can cut into your earnings. Understanding your fees, and minimizing them, is truly taking your retirement earnings to the next level. Nice tip on the Vanguard funds – I will have to check them out and take a closer look at what the fee structure is on my portfolio. Thanks!

    • says

      No prob Brend. 0.75% isn’t that great, but everything is relative! If we can pay 0.2%, then we’d be a full to pay 0.75% for a similar fund, unless the fund has an outsanding track record of outperformance. Over a 10 year time frame, everything mean reverts!

  11. says

    These fees seem small when you glance at them per $1,000. But as you’ve illustrated they can erode away a great deal of potential income.
    I might just have to look up personal capital to see how much we’ll lose to fees over the next 40-50 years.

    • says

      One of the things you’ll realize the more you accumulate is that you do NOT feel OK to commensurately pay more in fees. I think it’s human nature because it doesn’t cost a manager of your fund 10x more effort to manage when you have 10x more than you did at age 25.

      This is partly why it is so vexing for higher income earners who pay the most percent and absolute in taxes to be asked to pay EVEN more. Once you experience it, you’ll go on revolt

  12. says

    Sam, great article…I myself mostly invest individual stocks, but do own mutual funds through my 401K and have a couple outside my IRA’s, these all are no-load and low expense form Vanguard and fidelity. I am currently working on an article about one specific fund that I think can fit the everyday person: Vanguards Wellesley Income Fund (VWINX). Check it out, it may be a bit conservative for your taste, but its cheap, no-load, and a good performer.


  13. J in Florida says


    From the graph above I see you have a traditional 401(k) plan.

    My company just closed it’s doors forever and I will be withdrawing my 401(k) contributions from the companies horrific choice of funds (with even more horrific expense ratios.)


    My question is:

    What are your thoughts (or pitfalls) on converting the contributions to a ROTH IRA rather than just initiate a 401(k) rollover to Vanguard?

    I realize it will take a tax hit but the tax free growth for the next 20 years appears to outweigh the tax.

    J in Florida

    • says

      Hey J,

      Sorry to miss this earlier question. I’m against paying any sort of taxes upfront. So, the pitfall is you pay up front and the government goes on a massive spending binge and takes even more away from you when you decide to withdraw. They can change the rules at any time.

      But since you are in Florida and your income is under the 25% tax bracket, I don’t see much pitfall at all for you.


  14. says

    This is wonderful, Sam! I can see that you can save over $1K by switching from Fidelity Blue chip to Vanguard. I really need to look at what I am paying. Thanks for sharing.

  15. Mike says

    I probably should get more into these. I’ve been looking at Fidelity for a few small investments-not so much on the stocks but maybe in the mutual funds.

  16. says

    Nice article. Reminded me to check my expense ratio on my 401k us large company index fund. I was please to see i was only paying 0.02%. I don’t subscribe to the believe that active managers can generally outperform an index over long periods of time, net of fees. There may be a few, but probably none i’ll be able to access :)

  17. Christine says

    Hi, I was just wondering why you use Fidelity for your rollover IRA vs. opening an account directly with Vanguard, since you mentioned that you would primarily be investing in Vanguard funds in your retirement account. I’m in a similar situation and compared the cost of purchasing funds/stocks/etfs through Fidelity vs. Vanguard and found that Vanguard was more cost-effective. For example, if your account is between $200k-$500k, Vanguard charges $7/trade for stocks/etfs vs $7.95/trade at Fidelity. If you have over $500k at Vanguard, each trade is reduced further to $2/trade. Additionally, Vanguard transaction fees for some out-of-network funds are at most $35 whereas Fidelity charges a transaction fee of $75 for funds outside of their funds network, which includes Vanguard funds and some are not even made available to purchase. Is there a compelling enough reason to stick with Fidelity given that their fees are higher for accounts that have larger amounts? Just wondering.

    • says

      Several things:

      1) Easy to rollover to Fidelity
      2) I get 100 free trades
      3) I don’t care about saving $1 a trade. Maybe if I had a $10,000 portfolio I might care more.
      4) Im investing in stocks and other instruments in my Rollover IRA.

      Thanks for asking. Please tell me about your portfolio and what you are doing.

      • Christine says

        Thanks for your quick response. I guess I too would stick with Fidelity had I been offered 100 free trades, but unfortunately, that was not the case. I rolled my 401k over to an IRA at Fidelity last year, since I already have accounts with them and I can’t complain about their services and have been with them for over 12 years now, but after comparing their fees, I was considering switching over to Vanguard, since I also have Vanguard funds and was thinking of purchasing more and/or switching some of my existing funds within my account. I’m also trying to clean house a bit, since I have a combination of way too many stocks/etfs/funds, many of which probably overlap. But then I read your article and since you have such great insight on these topics and you were with Fidelity, I wanted to reach out to you and get your thoughts before pulling the trigger. I think I’ll go ahead and do the transfer to Vanguard, since they didn’t offer me any free trades, but I’ll keep my brokerage accounts with Fidelity and will let you know how it goes.

        Great article by the way…it certainly is a reality check to actually see the dollar amount in fees that we pay vs. the percentages!

        Thanks Again!

  18. Krista says

    This is so helpful and a little terrifying. I didn’t know personal capital offered this fee analysis and that’s my next stop after this post. I’ve used it for a while but haven’t payed much attention, clearly not beneficial. Thanks for directing me there!

  19. Thomas Schuerer says

    I would kill for such low expense + fee ratio.
    My 401k is with Transamerica, and the lowest expense ratio i have a choice for is 0.79% an the fee is set at about 0.76%.
    The highest is at 1.45% and average is between 0.91% and 1.10%.
    Even the few (2 to 3) Vanguard funds and the Vanguard Target Retirement Funds are at 0.91%+.
    I don’t have a lot of options. No rollover options here.
    With the funds i picked i pay about 1.50% to 2.00% in expenses & fees annually.

    The company i work for offers no matching. I’m wondering at what point it is more beneficial to switch to after tax investments with lower fees? My after tax Vanguard fund usually cost 0.17%.

  20. Helen Hoe says

    You folks are talking about 401K fees, what about 403b fees, can I do the analysis through that Portfolio Analysis tool? Thanks!

  21. Jane says

    I just checked our 401k fees with Personal Capital; 1.4% or 37% in fees over the next 10 years.
    We are employee/owners and contribute to the annual maximum of approx. $ 55,000 each per year. We are both in target date funds with John Hancock via our advisor at Ameriprise. Can you suggest where we might make changes? We have a small office of under 10 employees in our plan too. Do I look for another advisor or investment company etc?

  22. Enginerd says

    How do you recommend going learning about a 401(k) fee structure if it’s employer-provided? Is there any course of action you would recommend to get an employer to switch vendors? Do you have a post about the different 401(k) vendors and pros/cons?



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