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Portfolio Strategy

The True Cost of a 1% Expense Ratio

Even if you’re already on top of investing costs, you might be surprised to see how much of your hard-earned money you can keep by lowering these charges.

Articles by MP Dunleavey

By MP Dunleavey
  |  Published: December 2, 2013

You always strive to keep investing costs to a minimum, but there's nothing like running the numbers to see their full impact.

Even a small reduction in fees can put thousands more in your pocket in the short term—hundreds of thousands in the long term.

true cost 1 percent expense ratioImagine if there were a  way to up your long-term investment returns by about 70 basis points—and that it would be painless to do so. In fact, you could enjoy higher returns without crazy schemes or exposing yourself to undue risk.

Switching to a Betterment portfolio offers that possibility. Even if you’re already on top of your investing costs, you might be surprised (and motivated) to see how much money you can keep by lowering these charges.

After all, the average stock and bond mutual fund expense ratio is about 0.79%, according to an Investment Company Institute report. And that’s the average asset-weighted cost that investors pay; it doesn’t include other hidden charges such as load fees, which can easily bump your all-in costs close to 1% (nor does it include an advisor’s fee, which can also add to your expenses).

Here at Betterment we’ve boiled down what we charge to the smallest hit possible. We focus on low-cost ETFs, and we’ve chosen ones with high liquidity within each asset class. Your all-in costs—both for underlying ETFs and our management fees—for a 70% stock IRA portfolio in our “Best” tier is 0.26%.¹

Now consider this: at Betterment, we think lowering outright costs is just the start of the game. That’s why we’ve engineered our portfolio to be cost-efficient on many levels at once: minimizing taxes and fees, as well as risk—as well as reducing your time investment (a big savings for busy people), and limiting the impact of human volatility, a.k.a. emotion-driven decisions that put a drag on returns.

Whether you’re investing for the short- or the long-term, that cost inoculation means more money for what matters most to you. See for yourself.

Getting to your goal faster

Let’s say you’re saving for a happy occasion: a wedding, new child, a new business, down payment, or renovation.

This chart assumes a $100,000 deposit for a long-term savings goal, no further deposits, and shows returns net-of-fees on a total return of 8%.²

Years 8% return – typical 1% mutual fund cost 8% return – 0.26%* Betterment cost Betterment savings
5 $140,255 $145,172 $4,918
10 $196,715 $210,751 $14,036
20 $386,968 $444,160 $57, 192
30 $761,226 $936,071 $174,846

*Includes expense ratio and management fee for a 70-30 portfolio in the “Best” tier.

This is money you especially want to grow, because achieving that goal is going to enrich your quality of life for years. And lowering your all-in costs is a smart, efficient way to get more of the things you want.

After saving for five years for a wedding, say, who wouldn’t want an extra $5,000 for those reception costs?

Enjoy even more in retirement

The place where fees can make an even more tangible difference is in your retirement account. The amounts are larger, and you’re saving steadily for decades. Plus, the goal—financial security and peace of mind as you age—is a critical one.

This graph assumes monthly contributions of $1,000 over a 40-year period, and shows returns net-of-fees, on a total return of 8%.


It doesn’t sound like a lot—keeping 69 basis points in your pocket. But what a difference it makes over the course of 30 or 40 years. By lowering your costs that much, you’d save about $350,000 over 30 years in this scenario, and about $1,000,000 over 40 years.

In fact, if you have a $2 million nest egg earning 8% with 1% in costs, and you draw down $14,000 per month starting at age 60, your money will last until age 85. Reducing your costs by 0.69% will help your money last about five more years—until you’re a youthful 90.

Whatever your goals are, you’re paying for the best possible outcome. So weigh the costs in the present carefully, so that you can have more of what you want in years to come.

This article was originally published on Dec. 2, 2013, however reference links and numbers have been updated.

¹This includes a 0.15% management fee and the underlying expense ratio of 0.11%, for a balance of $100,000 or higher in the Best tier for a 70-30 allocation. We’ve updated our pricing structure since this article was published. Learn more at

²To illustrate the impact of varying expense ratios, we are using 8% for both scenarios— representative of what a 70% stock portfolio would be expected to return annually.

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