How it works
An expense ratio is a quiet annual tax on your entire balance — charged automatically, invisible on statements, and devastating specifically because it compounds. A target-date fund charging 0.55% against a 0.08% DIY equivalent looks like pocket change: forty-seven hundredths of a percent. Run the compounding and the framing collapses. On $100,000 growing at 7% gross with $12,000 added yearly, that gap strips roughly $118,000 from the ending balance across twenty-five years — money that bought nothing visible and returned nothing ever. The mechanism deserves respect: fees shave EVERY year's returns BEFORE compounding applies, so each shaved dollar also forfeits every subsequent year of growth it would have earned, which is why the gap curve accelerates — small at year five, serious at fifteen, staggering at thirty. This calculator plots that acceleration checkpoint by checkpoint. Fairness requires noting what TDF fees buy: automatic rebalancing and a professionally managed glidepath, genuinely valuable for hands-off savers. The rational comparison is therefore not TDF-versus-nothing but expensive-TDF-versus-cheapest-suitable-TDF, where basis points remain pure giveaway.
Formula
Net return = gross return − expense ratio | Ending = FV(balance, net rate, years) + FV of contributions | Drag = cheap ending − TDF ending
Tips
- Compare share classes — the same TDF family often charges wildly different fees.
- Inside 401(k)s, check whether a cheaper index TDF sits alongside the default option.
- Past roughly 15-year horizons, fee gaps dominate almost any selection nuance.
- Do not abandon the TDF glidepath for a slightly cheaper mix you will never maintain.
- Recheck ratios annually — fee compression keeps improving the cheapest options.
Frequently asked questions
- What is a good expense ratio for a target-date fund?
- Broad-index TDFs from major providers now charge around 0.05–0.12%, while actively managed siblings can run 0.5–0.75%+. Under roughly 0.15% for a complete glidepath is competitive; materially above that usually reflects active management you should consciously choose, not accept by default.
- How much does a 0.5% expense ratio really cost?
- Enormously over time. On the defaults here ($100,000 initial, $12,000 yearly, 25 years, 7% gross), a 0.42-point advantage compounds to roughly $119,000 - about 8.7% of the cheaper path's ending balance - despite sounding negligible per year. The gap widens every further year you stay.
- Are target-date funds worth the fees?
- Often yes for hands-off savers: automatic diversification, rebalancing and glidepath management remove behavioral failure modes that historically cost more than basis points. But paying 0.55% where an equivalent 0.08% index TDF exists forfeits roughly $118,000 here - compare share classes hard.
- Do expense ratios apply to my gains too?
- They apply to your ENTIRE balance daily — principal and accumulated gains alike — deducted through the fund's net asset value before returns reach you. A 0.50% fee on $100,000 takes about $500 in year one alone, gains included, which is precisely why drag compounds.
- Should I leave my employer's expensive default TDF?
- Check the menu first: many plans offer a cheaper index TDF alongside the default, making the switch trivial. A 0.47-point gap on $100,000 already costs roughly $470 in year one alone. Without alternatives, weigh the pricier fund against taxable DIY options before moving anything.