HomeRetirementYou NEED to know your expense ratios.

You NEED to know your expense ratios.

throw money in toiletNow that I’ve given our savings account the cold shoulder in hopes of building long-term wealth via our taxable and retirement accounts, basic investment strategies just wont cut it any more.

The need to go deeper.

In 2007, when I landed my current job with the Feds, I was handed a fat stack of HR paperwork as part of my new hire packet. One of the pieces of paper in this stack asked if I wanted to begin contributing to the government’s version of a 401k, known as the Thrift Savings Plan (TSP).

The paper told me that if I contributed 5% of my salary, the government would match that contribution and throw in an additional 5% on my behalf.

I didn’t have to be a savvy investor to know that a 100% return on investment was an incredible opportunity.

The TSP is nice in that it only has five funds that one can choose to invest in. They are…

  • C Fund: Essentially an S&P 500 index fund
  • S Fund: A total US stock market index (so companies the S&P doesn’t cover)
  • I Fund: An international fund that mimics a Morgan Stanley International fund
  • F Fund: A broad index representing the US bond market.
  • G Fund: A guranteed return fund. Currently about 2% ROI. 

For all of the bureaucratic red tape and politics that comes with the government, you sure can’t beat the simplicity of the TSP.

But the thing that puts the TSP miles ahead of the competition, likely even your 401k plan, is the expense ratios.

If you’re a super passive contributor to your retirement accounts you might not even know what expense ratios are.

Without boring you to death, expense ratios are a fee that you pay the organization that manages your investment account. You may not have known these expenses existed because you don’t pay them out of pocket, instead your organization just debits them from your account.

Know your expense ratios. 

It could literally mean the difference of tens (or hundreds) of thousands of dollars over the course of your accounts life.

For example, the TSP charges expense ratios of 0.029%. Or in other words, for every $1,000 you have in your TSP, they will deduct 29 cents, annually.

Whereas, if you have an actively managed account, it isn’t uncommon to have expense ratios of 1%, or in other words $10 is deducted for every $1,000 invested, annually.

Ten dollars a year might not seem like a lot, but OH BOY does it add up quick.

Impact of Expense Ratios over the long term

For the sake of making everything easy, let’s say you have $100,000 in your 401k right now. You add $10,000 to your account each year. You are planning on earning an 8% return on investment over the next 30 years.

Take a look at how an account with a 0.030% expense ratio absolutely DESTROYS an account with a 1.0% expense ratio.

Screen Shot 2015-03-04 at Mar 4, 2015, 10.30.57 PM

So while a 1% expense ratio may not seem like a lot up front, man-oh-man does it cost ya big bucks in the long run, $419,181.44 to be exact.

Why pay an organization $420,000, when you could keep all that money for yourself? 

I’m fortunate that the TSP has insanely low expense ratios. It would be stupid of me to not contribute as much as I can each year to take advantage of the low fees (hence the reason I’m hoping to max my contributions this year).

And the good news is, even if I quit working for the Feds, I still get to keep my TSP. This will be one account I will probably never get rid of.

“But Ninja I don’t work for the Feds.”

You ever heard of Vanguard? Of course you have! It’s universally known as being one of the most legit investing institutions in the universe (think the Costco of investing).

Vanguards expense ratios are really cheap compared to most of their competitors (although still two to five times that of the TSP).

The more money you have, the better rates you will get.

From 2007 to 2014, I was contributing to VTSMX, which is Vanguards version of a broad based stock market fund. The expense ratio was 0.17%. Not too shabby.

But now that I’m committed to not being such an investing dummy, I’ve sold all $30,000 of that fund and bought VTSAX, which is EXACTLY the same fund, but has an expense ratio of 0.05% (1/3 of VTSMX). The catch with VTSAX is that you have to have a minimum of $10,000 to invest in this account to qualify for the cheaper fee.

Had I left my money in the more expensive VTSMX, I would have paid $22,000 more in fees over the next thirty years.


So, seriously, if you haven’t thought twice about your investment (taxable and retirement) accounts’ expense ratios; you need to get off my web site and start doing some research (especially because your employer might have some really sucky options).

Not doing so could LITERALLY cost you a fortune.

*make sure you consider tax implications on realized gains if you sell investments from a taxable account. 



  1. Canadian mutual funds call it MER, management expense ratio, that can often be over 2%. People don’t know what MER is and never question it. The people selling them at the bank told my highly educated co-worker that there was no fee and he believed her. This sales technique is not uncommon.

    A Canadian tv program did an undercover investigation on financial service sales and found many of the sellers, including our major banks, to be intentionally deceptive or just really ill informed on the product they sell.

    I was so excited when Vanguard finally came to Canada and I have no mutual funds but I do have ETFs.

  2. Did you realize a taxable gain to swap into a lower fee fund? While I realize the gains on 30K and the tax impact of realizing those are probably far less than the 22K savings over 30 years, I would never advise swapping without considering the impact of taxes.

  3. Ninja-for the S fund- Doesn’t the total market mean that the fund is composed of SOME small, mid, and large cap; unlike the S&P which only has SOME large caps. Either way, the S fund can’t have “All stocks”.

    • Sorry didn’t mean composed of every stock in existence. Just meant it’s composed of a bunch of companies not included in the S&P.

  4. All my investments are in Vanguard funds and I try to keep fund costs as low as possible. I suggest people to keep their expense ratios as low as possible.

  5. I just did a guest post on the TSP and how awesome it is, especially for you non-uniformed service member folks who actually get a government match. It would have been nice to get a match from the Army, but what can you do .023-.029 percent ERs are impossible to beat and there are funds (eg. C fund) that act like index funds. It really is a no-brainer for government employees to contribute to the TSP and to leave $ in there whenever they leave government service (as opposed to rolling it over like I did).

    ALWAYS pay attention to expense ratios, excellent advice as usual Ninja.

  6. VTSMX vs. VTSAX:

    Vanguard offers a large variety of funds that qualify as “Admiral” versions of the fund so long as you keep a minimum $10K balance. Not so long ago, the minimum requirement for the Admiral shares was much higher, $50K as I recall.

    I agree with all the above about expense ratios; in fact, even Morningstar published a report a year or two ago where they said a low expense ratio was the single best predictor of success in owning a mutual fund. Like Savvy, I keep all my funds with Vanguard, and Fidelity also offers a comparable group of so-called Spartan funds that have similar make-ups and low expense ratios.

    When I was still working, I was on the 401(k) committee and we could see what investments people were choosing, though not the identities of the people investing in each fund. I actually saw people who had all their investments in a money market that was earning absolutely nothing but had a .45 expense ratio. But it would not have been appropriate for me to give these people advice even if I knew who they were. Still, very sad.

  7. As new investors…. what about the “target date funds”? My husband has a target date fund through his TSP and my 401k/403b are also target date funds…. we don’t know ANYTHING (yet) about investing so figured it was a good place to start. I am scared to pick funds on my own (my employer offers a bajillion choices) since I don’t want to have to worry about “trading” every week and watching the mrakets like a hawk! Help!!!

    • Target date funds are great if you want to be a little more passive. I have decided not to participate in the TSP target date funds because I don’t want any bonds in my portfolio at this point.

      That might be too aggressive for you, so if that’s the case the Lifecycle funds are a great option. I just like being actively involved in my money.

      My allocation is 50% to the C Fund, 25% to S fund, and 25% to the I fund.

      • In case Erin is still listening:

        Target funds can be an excellent choice for someone who doesn’t want to monitor their own investments. The fund is automatically rebalanced to keep to a set allocation that becomes more conservative over time, and all you have to do is make contributions. In any case, trading every week and watching the markets that closely is not something I would endorse for a variety of reasons. Just accept that the market will sometimes go up and sometimes go down, but the prevailing long-term tendency is for the market to go up.

        Gretchen Benz of Morningstar has endorsed target funds; so has Mike Piper of (I suggest reading his blog posts thereon.) I myself compared the results I would have gotten from using a target fund to the actual results I got from having about 7 mutual funds, and I found over a 5-year period I did a little better, but not much. But with target funds as with anything else, check the overall expense ratio. Vanguard has a very low expense ratio for its target funds; I would suspect the same is true for TSPs. Last time I checked, I was not as happy with the overall expense ratios for Fidelity’s Freedom Funds.

        As for bonds within a target fund, Ninja and I have had this dispute several times, and my feeling is that a small percentage of fixed income is a good idea even for young investors, as it cushions you against stock market volatility. At the same time, for a young investor, 100% in equities is not a bad choice either.

  8. 1) All $400k of my investments is in VTSAX – so loving your choice!

    2) That graph is giving me the middle finger.

  9. PBS Frontline did a special on expense ratios that broke it down very simply, and demonstrated the impact high expense ratios can have on a portfolio. I wish there was a way to mandate that all high schools show this at some point, as well as requiring employers show this to new employees once they are eligible to contribute to a plan.

    You can view it for free on PBS’s website:

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