What Is a Good 401k Expense Ratio?

Small investment fees may seem minor, but over time, they could reduce your retirement savings by a meaningful amount. For example, two people contributing the same amount to their 401k over 30 years could end up with very different outcomes if one pays just 0.5 percent more in annual fund expenses. That difference often comes down to the expense ratio—the percentage deducted annually to manage the fund.

Understanding how expense ratios work, what’s considered reasonable, and how to compare your options can help you keep more of your potential earnings. This article covers what expense ratios are, how they affect your 401k, and what to look for when evaluating fund costs in 2025.

📌 Also Read: Average Expense Ratios for Mutual Funds, Index Funds, and ETFs

What to Know About 401k Expense Ratios

Expense ratio is one of the most important and often overlooked costs inside your 401k. It’s a fee that quietly reduces your investment returns year after year. While it might seem small at first glance, the impact can grow over time and potentially affect how much you have available when you retire. 

Knowing what you’re actually paying for is a key part of making informed decisions about your investments and keeping more of your potential earnings working toward your goals.

What Is an Expense Ratio?

An expense ratio is the annual cost of managing a fund, expressed as a percentage of the total assets you have invested in that fund. These fees are automatically deducted from your investment, which means they reduce your fund’s performance before you see the results in your account.

✅ Fund management fees – Compensate the investment managers and research analysts who oversee the fund’s strategy.

✅ Administrative and recordkeeping costs – Cover tasks like processing trades, tracking ownership, and reporting.

✅ Legal and compliance expenses – Ensure the fund follows regulations and maintains proper documentation.

These costs are not billed separately. Instead, they’re built into the fund’s pricing, so while you won’t see a line item, their effect is real.

📝 Note: Expense ratios typically apply to mutual funds and exchange-traded funds (ETFs) inside your 401k. If your plan includes target-date funds, index funds, or actively managed funds, each one will likely have a different expense ratio.

📌 Also Read: SEC Investor Bulletin | Mutual Fund Fees and Expenses

How They’re Calculated

Expense ratios are calculated using this formula:

Annual Operating Expenses ÷ Average Net Assets = Expense Ratio

✏️ Hypothetical Example: If a fund has $10 million in total operating expenses and $1 billion in average net assets, its expense ratio would be:

$10,000,000 ÷ $1,000,000,000 = 0.01, or 1 percent

This fee is deducted daily on a pro-rata basis. That means you won’t notice it being pulled from your account in a lump sum. But over time, those small daily deductions compound and can lower your long-term returns.

📝 Tip: Even if two funds have the same performance before fees, the one with the lower expense ratio will generally leave you with more money over time.

Why They Matter

While a few tenths of a percent might not sound like much, over decades, the difference adds up.

✏️ Hypothetical Example: Let’s say two people invest the same amount annually for 35 years. One chooses a fund with a 0.2 percent expense ratio, and the other picks one at 1.2 percent. Assuming the same gross return, the investor in the lower-cost fund could potentially end up with about 23 percent more by retirement—just by avoiding higher annual fees.

Key points:

✅ Lower expense ratios let more of your investment earnings to stay in your account.
❌ Higher ratios gradually eat into your potential gains, even if upfront performance appears similar.

📝 Note: Past performance doesn’t guarantee future results, and lower fees don’t always mean better returns. However, when comparing similar funds, cost becomes a meaningful factor.

Expense Ratios vs. Other Fees

Expense ratios are just one piece of your 401k’s total cost structure. It’s important not to confuse them with other plan-level or participant-level fees.

Here’s how they differ:

Fee Type	What It Covers	How It’s Charged
Expense Ratio	Fund-level costs (management, admin, compliance)	Percentage of fund assets
Recordkeeping/Plan Admin	Account servicing, platform maintenance	Flat fee or asset-based
Participant Services	Loans, distributions, or personalized support (if offered)	Often per-use or flat rate
Advisory/Planning Fees	Investment advice or financial planning (if available)	Flat fee or percentage-based

📝 Tip: These additional fees are typically disclosed on your plan’s annual fee disclosure or quarterly statement. They are separate from your fund’s expense ratio, so be sure to look at the full picture.

What’s Considered a Good Expense Ratio?

Expense ratios can vary widely depending on the type of fund you’re investing in. While lower costs don’t guarantee better outcomes, understanding the typical ranges for different fund types can help you make informed choices and potentially keep more of your earnings over time.

Average Ranges for 2025

Here are the typical expense ratio ranges for major fund categories, based on the most recent data available:

✅ Index Mutual Funds: Generally range from 0.05 to 0.10 percent, with an asset-weighted average of 0.05 percent as of 2024. These funds aim to mirror a market index and tend to have lower operating costs.

✅ Index ETFs (Exchange-Traded Funds): Typically fall between 0.10 and 0.20 percent, with an asset-weighted average of 0.14 percent in 2024. ETFs often track indexes similarly to mutual funds but trade on exchanges.

✅ Actively Managed Funds: These tend to have higher costs, generally ranging from 0.40 to 1.00 percent, with some niche or specialized strategies exceeding 1 percent. The asset-weighted average for active U.S. equity funds was approximately 0.60 percent in 2024.

✅ Federal TSP Funds (Thrift Savings Plan): Offered to U.S. government employees, these have some of the lowest expense ratios in retirement plans, ranging from 0.036 to 0.043 percent. While not available to everyone, they serve as a benchmark for low-cost investing.

📝 Note: These are asset-weighted averages, which reflect where most retirement plan dollars are invested. Expense ratios on less commonly used funds may fall outside these ranges.

How to Check Yours

Finding your fund’s expense ratio may take a few steps, but it’s worth the effort. Here’s where to look:

✅ 401k Plan Portal:

Log in and review the “Investment Options” or “Fund Details” section for each fund’s expense ratio.

✅ Annual Participant Fee Disclosure (404a-5 Notice):

Plans must furnish a yearly document that lists the expense ratios of every designated investment option.

✅ Fund Provider Website:

Visit the provider’s website and locate the fund prospectus or fact sheet. Look for the “Fees and Expenses” section.

✅ Form 5500 (Schedule C):

Some plan administrators offer access to this annual filing, which may include aggregate fee data. While more technical, it’s useful for a high-level overview.

📝 Tip: When comparing options, always look for the net expense ratio, which factors in any temporary waivers or reimbursements.

Index Funds vs. Actively Managed Funds

While expense ratio is just one factor, cost differences between index and actively managed funds can be significant.

Cost Differences:

Beyond Cost—What Else to Consider:

✅ Tracking Error:
Index funds are built to closely match a benchmark, so their performance tends to align with market averages. Active funds try to outperform but don’t always succeed, especially after fees.

✅ Strategy Fit:
Some specialized or sector-specific funds charge higher fees due to the expertise involved. These may be worth considering only if they consistently generate stronger net performance.

✅ Trading Activity:
Active funds often have higher portfolio turnover, which can lead to taxable events in regular brokerage accounts. This matters less in a 401k, but it’s still part of the total cost equation.

📝 Note: In most 401k plans, a “good” expense ratio in 2025 would typically be:

This assumes you’re comparing funds with a similar level of risk and expected return.

📌 Also Read: Index Funds vs ETFs vs Mutual Funds: Which One Should You Choose?

How to Keep Your 401k Costs Low

You can’t control market returns, but you can manage how much you pay in fees. Reducing unnecessary costs, especially expense ratios, can help preserve more of your potential retirement savings. 

Here are several ways to keep your 401k as cost-efficient as possible.

Tips to Lower Expense Ratios

✅ Choose Low-Cost Index Funds

Broad-market index mutual funds and ETFs typically have some of the lowest expense ratios, often between 0.05 percent and 0.15 percent. These funds aim to mirror well-known benchmarks like the S&P 500, making them a cost-efficient foundation for many long-term portfolios.

✅ Use the Brokerage Window (If Available)

Some 401k plans offer a self-directed brokerage window, which allows participants to invest beyond the plan’s core fund lineup. This feature may give you access to a wider selection of low-cost ETFs or institutional share classes with lower fees than your default options.

✅ Consolidate Small Retirement Accounts

If you’ve worked at multiple companies, you may have several 401k accounts with small balances. Consolidating these accounts—either into your current 401k or a rollover IRA—can help you avoid duplicative account-level fees and make your investments easier to manage.

✏️ Hypothetical Example: If you’re paying a $40 administrative fee on three separate accounts, consolidating them could save $80 per year and reduce paperwork.

✅ Review Your Fees Annually

Each year, take time to review your plan’s fee disclosure documents, which are typically available online or provided by your HR department. Compare the expense ratios in your fund lineup with current industry averages to see if lower-cost options are available.

📝 Tip: Fee disclosures may also list plan-level charges that apply to all participants. Knowing the full picture helps you assess total cost.

Mistakes to Avoid

❌ Skipping the Fee Disclosure

If you don’t review your quarterly or annual fee statements, you might miss important updates or rising costs. These documents clearly break down the fees you’re paying—both at the fund and plan level.

❌ Assuming Higher Fees Mean Better Results

Paying more doesn’t guarantee better performance. In fact, research consistently shows that higher-cost funds rarely outperform their lower-cost peers after fees are taken into account.

❌ Sticking With Default Fund Options Forever

Many participants stay in the fund they were defaulted into when they enrolled. These defaults, such as target-date funds, may carry higher fees or aren’t always optimal long-term. It’s a good idea to reassess your fund lineup periodically and switch to lower-cost options if appropriate.

❌ Overlooking Non-Investment Fees

While expense ratios are important, don’t forget about other potential charges in your 401k, such as:

These extra costs may not show up in the fund’s expense ratio but can still eat into your balance over time.

The Bottom Line

Expense ratios may seem small at first, but over the course of decades, they can make a noticeable difference in your retirement savings. Taking a few minutes to review your plan’s fee disclosures, compare your fund options, and consider shifting into lower-cost choices may help preserve more of your potential long-term growth.

📌 For more on how to optimize your 401k, explore our other articles below:

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Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

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