Mutual fund expense ratios are the most visible cost of investing, and they have been falling for nearly three decades. That is good news for savers. It is also incomplete news, because the expense ratio is only one line in the full cost of owning a fund. A teacher with a 403(b), a county employee with a 457(b), and a retiree with a rollover IRA may each be paying two or three distinct layers of cost, and only one of those layers appears on the fund fact sheet.
Understanding the difference between the sticker price and the total price is one of the few areas of investing where a modest amount of homework produces a reliable and permanent improvement. Costs are one of the very few variables an investor actually controls.
What an expense ratio actually measures
An expense ratio is the annual percentage of fund assets deducted to cover the fund’s own operating costs: the investment management fee, administrative and custody expenses, and, in certain share classes, a 12b-1 distribution and marketing fee. A fund reporting 0.40% costs roughly $200 per year on a $50,000 position.
You will never see that $200 on a statement. It is netted out of the fund’s net asset value every day, so the cost arrives as a slightly lower return rather than as an invoice. That invisibility is exactly why the number deserves deliberate attention.
Where fund costs stand in 2026
In March 2026 the Investment Company Institute reported that from 1996 through 2025, average expense ratios fell 62% for equity mutual funds and 57% for bond mutual funds. Looking at 2025 alone, ICI found that equity mutual funds averaged 0.40% and bond mutual funds averaged 0.36%, while index equity ETFs averaged 0.14% and index bond ETFs averaged 0.09%. Money market funds moved the other way, rising one basis point to 0.24%, as firms continued to pare back the fee waivers they had used when short-term rates were lower.
Morningstar’s separate annual fee study reached a compatible conclusion, placing the asset-weighted average fee paid across United States funds near 0.32%, less than half of what investors paid two decades ago.
One caution belongs alongside those numbers. They are market-wide averages, weighted heavily toward the very large, very inexpensive index funds where most dollars now sit. They do not describe your portfolio. Funds charging well above 1% still exist in meaningful numbers, and in our experience they cluster in small employer plans and in some California school district 403(b) menus.
Costs that mutual fund expense ratios leave out
Sales charges and surrender charges
A front-end load is deducted from your deposit before a single dollar is invested, and some share classes still carry loads approaching 5.75%. Other share classes apply a contingent deferred sales charge if you sell within a stated number of years. Variable annuity subaccounts, common inside 403(b) plans, frequently add a surrender schedule of their own. None of these amounts is included in the expense ratio.
Trading costs inside the fund
When a fund buys and sells securities, it pays bid-ask spreads and, on larger orders, market impact. Those costs are borne by the fund and reduce your return, yet they are not reported in the expense ratio. A strategy that turns over most of its portfolio each year therefore carries a real cost that the stated ratio understates.
Tax cost in a taxable account
In a taxable brokerage account, a fund that realizes gains must distribute them, and shareholders owe tax on those distributions even if they reinvested every dollar and even if the fund lost money that year. California applies ordinary state income tax rates to capital gains with no preferential long-term rate, so for California residents the annual tax drag on a high-turnover fund is often larger than the expense ratio itself. This cost disappears entirely inside an IRA, a 403(b), or a 457(b), which is why account placement matters.
The layer sitting above the fund
Employer plans often add recordkeeping or platform fees. Annuity-based 403(b) contracts add mortality and expense charges. An advisory relationship adds an advisory fee. Each of these is separate from, and stacks on top of, the fund-level expense ratio. The only number that matters for decision-making is the sum.
Quick check: which fund costs the investor more?
Fund A reports an expense ratio of 0.45%. Fund B reports 0.60%. Both are held in a taxable account. Select an answer below to see the reasoning.
A. Fund A, because a lower expense ratio means a lower total cost
B. Fund B, because 0.60% is always more expensive than 0.45%
C. There is not enough information to answer
What a fee difference compounds into
The following is arithmetic, not a forecast. It assumes a single $250,000 investment held for 25 years earning 6% per year before costs, with the stated annual cost deducted each year. No specific fund or result is implied, and actual returns will differ.
The Securities and Exchange Commission makes the same point in its investor bulletin on understanding fees, illustrating that a portfolio charged 1.00% per year finishes roughly $29,000 behind an otherwise identical portfolio charged 0.25% on a $100,000 investment over 20 years.
How to find out what you are actually paying
- Read the prospectus fee table. Every fund prospectus contains a standardized table with two sections, Shareholder Fees and Annual Fund Operating Expenses. The SEC investor bulletin on fund fees explains each line.
- Run the fund through FINRA’s analyzer. The free FINRA Fund Analyzer compares the projected cost of holding specific funds over a chosen period, including loads.
- Request your plan’s fee disclosure. Participants in ERISA-covered plans receive an annual fee disclosure. California public school 403(b) participants are not covered by ERISA, so the disclosure usually must be requested directly from the district’s third-party administrator or the product vendor.
- Add the layers together. Fund expense ratio, plus any wrapper or platform fee, plus any advisory fee, equals what you pay. Write that one number down.
When a higher expense ratio can be defensible
Cost is not the only consideration, and treating the cheapest option as automatically correct is its own mistake. Certain asset classes, including some international small-company and specialized bond strategies, are genuinely more expensive to run. A stable value option inside a 457(b) carries a cost for a reason. A fund that is modestly more expensive but gives you an exposure your portfolio lacks may earn its keep. The discipline is not to minimize cost at all times; it is to know the number, and to require that anything above the low-cost baseline justify itself.
How we approach fund costs for clients
As a fee-only registered investment adviser, we receive no commissions, no 12b-1 payments, and no compensation from any fund company. When we review a new client’s accounts, one of the first things we build is a complete cost picture across every layer, because that figure is frequently two or three times what the client believed it was. Reducing it does not require predicting anything about markets, which is what makes it such a durable place to begin.
Mutual fund expense ratios have never been lower across the market as a whole, but averages do not pay anyone’s retirement. If you are not certain what your own portfolio costs, or you suspect your 403(b) or old employer plan is more expensive than it needs to be, we are glad to look. You can schedule a free 30-minute call with Rooney Wealth Management, and there is no obligation of any kind.
Rooney Wealth Management LLC is an investment adviser registered with the state of California. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your tax or financial professional regarding your specific situation.
