A fund takes its expense ratio out of your balance every year, whether it gains or loses. That’s the one piece of your return you can predict. Compare each fund’s ratio with an index fund covering the same market, and replace any that charge several times more inside your IRA or 401(k), where switching triggers no tax.
Nobody can tell you what your funds will earn next year, but you can know exactly what they’ll cost. The expense ratio is set in advance, and you pay it in a losing year just as you do in a winning one.
You never see a bill. The fund pays its operating costs out of its own assets, so the fee shows up only as a smaller return. A fund that earns 10% before a 1% expense ratio hands you 9%.
Small percentages compound. In an SEC example, $100,000 earning 4% a year for 20 years grows to about $208,000 with a 0.25% annual fee and about $179,000 with a 1% fee. That’s $29,000 lost to three-quarters of a percentage point.
In 2025, the average dollar in an actively managed stock mutual fund paid 0.64% a year, while the average dollar in an index stock mutual fund paid 0.05%, according to the Investment Company Institute. An index fund at 0.05% costs less than a tenth as much as an active fund at 0.64%.
Find the number for every fund you hold. It’s the total annual fund operating expenses line in the fee table of each fund’s prospectus. Your 401(k) plan also has to send you an annual chart listing each fund’s expense ratio as a percentage and in dollars per $1,000 invested.
Then compare each fund with an index fund that tracks the same market, and switch when yours charges several times more. In a 401(k), compare against the cheapest fund the plan offers for that market. Inside an IRA or 401(k), selling one fund and buying another triggers no tax. In a taxable account, a sale can realize capital gains, so weigh that tax against the fee savings, or send new money to the cheaper fund.
Make the expense ratio the first number you check before you buy any fund.
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