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A Simple Change That Would Help Millions of Investors

Fidelity Investments brought in $12.6 billion in revenue last year, according to Forbes. Ned Johnson, the son of the company's founder, is worth $9.3 billion, making him the 47th richest man in America.

Fidelity has done an amazing job bringing mutual funds to investors around the world. That's created an extraordinary business: The average Fidelity retirement account had $89,300 in it last year, and Fidelity's average management fee was 1.01% of assets, according to Advisor Investments. The average customer, then, paid Fidelity $901 for its services last year. Not even Apple earns that much annual revenue from each customer.

But there's something incredible about this success. No Fidelity customer actually received a bill for $901 last year. No customer wrote a check for that amount. No one put $901 on their credit card, or wired that much to Fidelity through PayPal. No one receives a bill from Fidelity in the same way they receive a phone bill from AT&T, and no one pays Fidelity for its services in the same way they pay their power bill or their mortgage.

I'm picking on Fidelity, but this is how the entire money management industry works. Most mutual-fund revenue is received based on a simple calculation: At the end of each day, an annual management fee is divided by 365, and multiplied by the amount of assets under management. That amount -- its daily fee -- is deduced from the fund. It's automatic. Customers are charged (big) fees for each day they invest in their funds, but no one pays -- or even sees -- an actual bill.

There's nothing sinister about this. Mutual funds are upfront about their fees and are required to clearly disclose annual management fees in annual investor reports.

But I can think of no other industry where customers can pay literally tens of thousands of dollars per year and not even realize it. Since fees are disclosed as a percentage of assets, rather than a dollar amount, they're harder for lay investors to put into context. And since they're deducted automatically, rather than billed directly, they're out of sight, out of mind.

I began thinking about this last year when talking to a family member who, after digging through his 401(k), realized he was paying $350 a month for the privilege of investing in a mutual fund that had underperformed its benchmark for a decade. That blew him away. He's a penny-pincher who will walk a mile to avoid paying a $5 parking fee. But he was paying 70 times that amount each month for his mutual fund. The fees he paid on his fund were enough to cover a great vacation each year for the 15 years he owned the fund. Literally, 15 trips to Europe.

The worst part is that he didn't even realize he was paying that much. Sure, he could have looked at the fund's prospectus and discovered his 1% management fee. But like most of us, he didn't. And it took him more than a decade before he did the simple calculation that showed a 1% management fee on his $420,000 account came out to a staggering $350 a month -- again, for a poorly managed fund.

I imagine there are tens of millions investors in the same position. The same people who are appalled at paying $5 a month for their checking account service fee could easily be paying 20, 50, or 100 times that amount for their 401(k) without even knowing it.

What if this were different? What if mutual funds and money managers had to charge fees like all other businesses: a monthly bill sent directly to customers?

You can guarantee one thing: There would be an investor revolution.

Imagine if every month, while paying your mortgage, your power bill, and your cell phone bill, you had to write a check to your mutual fund manager for $200. You wrote another check to your 401(k) plan administer for $75, and perhaps another check to a custodian bank for $25.

You would instantly become keenly aware of fees. You'd probably become obsessed with them. You wouldn't put up with a high-fee investment manager who chronically underperforms his benchmark. You'd shop around to see who offered the lowest costs, and you'd relentlessly harass your H.R. department to find a retirement-fund administrator with lower fees.

Very little of that behavior is happening right now.

Two years ago, the Department of Labor created a new rule mandating that 401(k) accounts disclose all the fees participants are being charged each year. This is a step in the right direction, but only a small one. According to a study by industry researcher LIMRA, 22% of 401(k) participants think they don't pay any fees or expenses, up from 38% before the new disclosures went out. That's progress, but still appalling: One-in-five Americans is likely paying hundreds of dollars a year in fees while thinking they're not paying a penny. Fully half of investors in LIMRA's survey said they still didn't know how much they were paying in fees, and most of those who said they knew were wrong, often by an order of magnitude. Until investors actually have to write a check themselves, they are going to be oblivious to the fees they're paying. That promises more bad investing decisions, and a wealth transfer from workers to Wall Street based solely on a lack of understanding.

According to Demos, the average two-earner couple will pay $155,000 in 401(k) fees over their lifetime. That's enough to buy two-thirds of an average American house. Is it asking too much to bring a little light to these fees by making customers pay them directly? I don't expect any mutual funds to do this -- it'd be a logistical nightmare, and the current system works wonders at maximizing revenue. But I know customers would make better decisions if they would.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (38) | Recommend This Article (76)

Comments from our Foolish Readers

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  • Report this Comment On March 17, 2014, at 4:13 PM, Mega wrote:

    Great article Morgan.

    I think asset management is a great business model, but you have a good point that it can also be unfair and predatory.

    I've never quite found the right asset managers to invest in though. Since it's an asset light business, much of the value creation can happen privately, transitioning to the public markets only when growth slows.

  • Report this Comment On March 17, 2014, at 4:45 PM, Mathman6577 wrote:

    If avoiding fees is the goal it's best to invest in individual stocks and index funds.

  • Report this Comment On March 17, 2014, at 4:53 PM, ellaerdos wrote:

    Good reading!

    Here are a few other unfair financial zingers I would like to know about.

    If we have so much why has the price of fuel not moved down?

    Who went to jail after the real estate bust?

    Why does it take a year in some places for the VA to work on a claim but the President and Congress can walk into Bethesda Navel Hospital?

    Why do we tax SSI?


  • Report this Comment On March 17, 2014, at 6:47 PM, FoolTheRest wrote:


    These are not really about mutual fund fees, but I will take a stab at it.

    The price of fuel has moved down. Natural gas is significantly lower than it was last decade. Gasoline and diesel are also much lower than it was during its 2008 peak. Arguably, these high prices caused unused extraction techniques to be profitable, thus bringing in greater supply of fuel, and lowering the costs to what they are today. Keep in mind that the cost of fuel must have a floor which includes the cost of taxes, extraction, processing, and transportation. At this floor rate, there is little benefit to fuel producers, so they do not produce. This causes lower supply, which increases the market rate. Again, at the higher rate, production becomes profitable. Fuel prices are subject to supply and demand with a cost floor, which is now more expensive than it used to be.

    As far as I know, no one went to prison except a few inside traders, and they may have existed without the crisis. Who would you have pay for popular unrest with their freedom? Banks, brokers, originators, security packagers, the federal government, bond rating agencies, investors, real estate speculators and flippers, you and me for obtaining and defaulting on mortgages we cannot afford? Jail time requires illegal activity. Most of these people did not do anything illegal. Unethical, certainly. Greedy, without a doubt. But not illegal. We can change regulation and behavior, but we cannot retroactively change laws to incarcerate people we blame.

    I do not know why some VA claims take a long time. Possibly they have difficult cases or incompetent administrators. As an anecdote, most people I know actually had a reasonably quick claims process. I have no complaints about VA claims nor quality of healthcare. The attitude of many VA non-medical staffers is another story.

    For many who depend only on SSI, the income is not taxed. Why do we collect taxes from people with SSI plus other income above certain thresholds? Because we can. There is very little public outcry for people who work while older or planned for retirement and subsequently have other sources of income, even if the income is not that much. I am not saying it is fair; it is simply our system until enough voters complain about it.


  • Report this Comment On March 17, 2014, at 6:54 PM, FoolTheRest wrote:

    I also see you are new to the boards in the last 60 days. Welcome!

  • Report this Comment On March 17, 2014, at 7:25 PM, AmbiInvestor wrote:

    What a revelation ? I didn't know if I have to pay for my 401k account. Keep up the good work

  • Report this Comment On March 17, 2014, at 7:28 PM, randyk62 wrote:

    We tend to not think about things we don't write checks for - absolutely right.

    You have become required reading every Tuesday and Friday Mr. Housel.

  • Report this Comment On March 17, 2014, at 8:21 PM, ellaerdos wrote:


    Thanks for the come back and the welcome. I joined TMF because you seem to be real folks here, everywhere else I have been people seem to be very dispassionate.

    I took over my own accounts in 2009 and have done very well - up until last year when I misread the market and took a beating, hence the 7th Cav handle.

    I don't know if you realize it, but most people don't have a clue about saving, much less the benefits of an IRA. Many many blue collar workers think that SSI and Medicare will cover them when they retire. They are not lazy, just badly educated and poorly informed. I know because I was one of them, in most ways I still am.

    I look forward to your posts.


  • Report this Comment On March 18, 2014, at 12:31 AM, herky46q wrote:

    If mutual fund companies could even note on a client's statement what was deducted for a management fee, that would be so much more informative and transparent. Vanguard will let me know about an account maintenance fee if I fall below a certain balance but nothing more. Good thing I know their fees are super low.

    Also, this practice is worse than tax withholding because we can at least see the numbers on the pay stub.

    So many great lines in this article. It is another keeper.

  • Report this Comment On March 18, 2014, at 4:03 AM, Rivergrrl wrote:

    Thank you Morgan, for another splendid article. I have been frustrated in trying to determine how mutual fund fees are extracted from my Fidelity IRA, it's not visible at all. However with the excellent research and advice here at MF, I have been selling down my mutual funds to purchase individual stocks. My portfolio is now 67% stocks and 33% funds. My question: is there a minimum level of mutual funds I need to keep in my portfolio? Can I avoid the fund fees by continuing this trend? Will my account rep call me and tell me I'm nuts, get back on board the fund train? I always look forward to your insights.

  • Report this Comment On March 18, 2014, at 8:28 AM, XXF wrote:

    Granted this is asking consumers to take a modicum of responsibility, which Morgan is ever reluctant to do, but I get an email every time fees are paid from any of my investment accounts because I have them all monitored by Mint. Of course my largest positions are in VINIX (.04% expense ratio) in my 401(k) and VTSMX (.17% expense ratio) in my non-401(k), so I've got a handle on my expenses already.

  • Report this Comment On March 18, 2014, at 12:54 PM, devoish wrote:

    "The fourth-quarter average was nearly double what is traditionally considered the market low of March 2009 when that average was $46,200, Fidelity said. For people 55 and older who are still working, the average balance was $165,200." - Fidelity investments.

    That plus SSI should let them retire comfortably for at least ten years. Lets hope it doubles for them again.

    Best wishes,


  • Report this Comment On March 18, 2014, at 4:08 PM, stockdissector wrote:

    Maybe they should outlaw automatic deduction of management fees and start billing. Maybe people will wake up and move for further changes.

  • Report this Comment On March 18, 2014, at 5:13 PM, IRA2014 wrote:

    I'm well aware of the management fees in my individual funds. I wasn't aware of the custodial fees or plan administrator fees of the 401k though. I work for a large corporation and our 401k is handled by fidelity. We don't have a local HR dept. I need to call headquarters and get some more information.

    What is a fair rate for custodial and administrator fees? Also did I read it correctly that those come out of your funds daily like fund management fees? Thanks in advance to anyone who answers and thank Morgan for writing this.

  • Report this Comment On March 18, 2014, at 5:41 PM, xetn wrote:


    "Maybe they should outlaw automatic deduction of management fees and start billing. Maybe people will wake up and move for further changes."

    Maybe employers should stop withholding taxes and have you write a check for them every payday.

    Maybe they should stop withholding insurance premiums and have you write a check for them.

  • Report this Comment On March 18, 2014, at 5:44 PM, The1MAGE wrote:


    By misreading the market, it sounds like you are trying to be a trader, trying to move in and out of the market in an attempt to make short term gains. Correct me if I am wrong.

    Around here people are investors, not traders. We find good companies, and hold them while they work to build themselves up, and we keep an eye on them to make sure they are still following a good business strategy.

  • Report this Comment On March 18, 2014, at 5:53 PM, Hellborn69 wrote:

    Morgan, what about fees associated with ETFs?

    How do they compare to mutual funds and what exactly do they cover?

  • Report this Comment On March 18, 2014, at 6:08 PM, stockdissector wrote:


    What's your point? I'm self employed so I do write checks for all the things you mentioned with the exception of Health Insurance Premiums which comes out my wife's paycheck. If wasn't for her I would write a check for health insurance premiums too.

  • Report this Comment On March 19, 2014, at 3:39 AM, talotu wrote:

    Ask someone how much they owed (or got back) with their tax return and they will be far more accurate than if you ask them what their income tax liability was for the year.

    It's the same dynamic that works for auto-pay subscription services, you are far more likely to stop paying when you have to write a check than you are if the money magically disappears.

  • Report this Comment On March 19, 2014, at 4:29 AM, kyleleeh wrote:


    My employer discloses on every paycheck I get how much they withheld for taxes, how much employer taxes they paid, and how much employer paid benefits costs they incurred. All right down to the very penny, then they send me a year end breakdown showing me the total amount of compensation and taxes spent on me. If mutual funds did something close to that I think it would satisfy most people.

  • Report this Comment On March 19, 2014, at 12:15 PM, deckdawg wrote:

    The same thing might be said about taxes. What if we had to write checks? Young people get a first shock when they see taxes witheld on their first paystub. But that fades away after a while. Property taxes are bundled with the mortgage payment. Lots and lots of taxes are made as invisible as possible (on purpose).

    Then you get old. The house is paid off, and you start having to mail in the property tax check. You have to start mailing in the quarterly estimated tax payments. The shock comes back. But what if we had to mail those checks every month, for our entire lives? That would provide some tax visibility, for sure.

  • Report this Comment On March 19, 2014, at 6:17 PM, devoish wrote:

    It is an interesting comparison, withheld but posted taxes vs hard to locate 401k fees.

    I'll say this though, I'll bet the vast majority of tax payers with 401k's get get better performance out of their Government, even this one, than their 401k manager.

    Best wishes,


  • Report this Comment On March 19, 2014, at 8:08 PM, Youngshooter wrote:

    Deckdawg is right on. Taxes....payroll withholding of income taxes is the worst thing. Most employees are happy if they receive a refund when they file their tax return. Make everyone write a check at year end for taxes, and I think people would revolt.

  • Report this Comment On March 19, 2014, at 11:42 PM, SkepikI wrote:

    hmmm. Well, I have a small amount of my retirement accounts in Fidelity, in the interests of diversification. Those accounts have grown over time. IF I had FRITTERED the Funds away, I would have lots of stuff I couldn't sell in a pinch, a few extra pounds on my frame, and a weaker liver (I live in beervana). So on the whole, since most of my funds are in Vanguard with very low fees, I think its a fair deal. AND if some day like at my 4 decade FA/Broker Merrill Lynch, Vanguard turns out to be the Bernie Madoff of the middle class low fee investment houses, I will be doubly glad for the diversification.

    To quote some wag I can't recall, you can pay me now or pay me later, only idiots bury gold coins in their CA back yards....

  • Report this Comment On March 19, 2014, at 11:45 PM, SkepikI wrote:

    ^ And Morgan, just in case you missed the oblique point, many of us ARE keenly aware of the fees, pay attention and generally accept some nicks in the interest of not being too dependent on business models that are subject to random events EVEN YOU cannot predict.....

  • Report this Comment On March 20, 2014, at 12:20 AM, FinanceBuzz wrote:

    For years, I have applied this same logic but to income taxes. If citizens had to sit down and write a check to Uncle Sam for their taxes, we would see massive citizen unrest over the level of taxation. Whatever the application, price sensitivity is muted when we don't see the price. Furthermore, if we do not associate at least as much value for the product or service as the price we are paying monetarily, we are going to be dissatisfied and attempt to correct that imbalance.

  • Report this Comment On March 20, 2014, at 10:21 PM, bamasaba wrote:

    You guys should talk to your employers. My tax deduction is written on every pay stub which I receive twice monthly so it is very easy to tell.

  • Report this Comment On March 21, 2014, at 5:51 AM, Mathman6577 wrote:

    Good point about taxes. Most people don't look at the deductions section of their pay stubs (even if they get pay stubs at all as many companies move to direct deposit) or look at the taxes section of their mortgage payment. People don't realize that they work for the first ~ 5 months of the year to pay the government. Investment fees are small compared to the amount of taxes paid every year.

  • Report this Comment On March 21, 2014, at 10:35 AM, galtsrevenge wrote:

    By the same token wouldn't be great if every employee got htier entire pay check every month and the had to right checks to all of the appropriate taxing bodies. Maybe they should also right checks to the appropriate tax body for each pass through tax that is included in their phone bill, utility bill, and yes even part of their brokerage statement. (SEC transaction fees)

    You are correct. We would have a real revolt.

  • Report this Comment On March 21, 2014, at 10:38 AM, galtsrevenge wrote:

    I meant write not right by the way

  • Report this Comment On March 21, 2014, at 10:43 AM, galtsrevenge wrote:

    The real expenses of most mutual funds go beyond management fees and are available only, if you ask for the "statement of additional Information". Management fees generally do not include trading costs.

  • Report this Comment On March 21, 2014, at 12:24 PM, notthisagain wrote:

    Thanks for the breakdown of paying fees.

    To me what is important is how much a fund has changed in the time I have owned it. I have found that this information on the web pages and charts does not tell me real money information.

    In the fall of 2011 I decided to make a spreadsheet and track what I had invested. Please know that my math skills are add subtract multiply divide and percent.

    Number of shares time cost equals amount invested.

    Distrubutions ahow as money and shares. Shares added to total shares times NAV equals todays value. Value from investment is gain, gain divided by investment is percent change.

    What I notice different is Fidelity places new shares from distributions as new investment and I show it as percent gain. After two years our showing for each fund varies greatly. I can compare the percent gain on my spreadsheet and tell which funds are doing well or not. The cost of the fund dose not determine the gain. The cost may or may not be proportional to the gain.

    What I want to know is- what is the gain of the fund in Real money- shares times NAV. How much it cost to get there is more of an academic information comarison.

    My best performing funds do not show the same on Fidelity fund comparison charts.

    But I do know how much money I invested and how much money it is worth in real dollars.

    Wait intel you inherit your spouse proportion and watch everything change as half of each investment gets reset to the date inherited. Then the change and percent on Fidelity makes very little sense to Real money.

    Try making a spreadsheet and track your investing money in real life terms.

  • Report this Comment On March 21, 2014, at 12:27 PM, bwilsonbridgew wrote:

    What steps can I take to find lower costs for my 401k/roth IRA? I work for a large company and our retirement funds are managed by Fidelity. Is it even possible that I can get lower rates anyway?

  • Report this Comment On March 21, 2014, at 12:34 PM, pondee619 wrote:

    Would the change work to lower fees or keep people out of the market? Would fees go down or would people not pay them and keep their money in the matre$$?

  • Report this Comment On March 21, 2014, at 2:43 PM, VieuxCarre wrote:

    Great article. I'm only a mutual fund guy when I have to be but more transparency is always a good thing. It would be great if Morgan could put a call into the lobby group that represents the mutual fund industry and see if he could get a response from them. Even if the response was not filled with information, it might be very telling. In any case, it is always good to be reminded of the transactional costs and how they relate to wealth creation/destruction.

  • Report this Comment On April 01, 2014, at 12:06 PM, AB401k wrote:

    This is one of the most thorough articles out there on the subject. Here are some stunning stats:

    Nearly 70% of 401k participants think they pay no fees or their employer pays them

    62% of 401k participants are unsure of the fees they are paying in their 401k

    Nearly 30% of 401k plan sponsors do not know the average expense ratios of the funds in their plan

    32% say the don't have the knowledge to understand the effects of fees over time.

    It's your future, your money! In regards to your money nothing is more important than know how much you have, where it is, and if invested, how much it's costing you TO invest.

    These can be easy fixes with a little proactivity on the part of individual investors. For folks in a 401k plan at work, ask your employer if they have benchmarked their plan against lower cost alternatives. It's required. Annually. Any plan no matter 2 people or 2000, zero plan assets, or $50 million, has the right to low cost investments in the plan. Never settle for someone telling you, you don't "qualify" because you are too small. Nothing can be further from the truth.

  • Report this Comment On April 08, 2014, at 11:16 AM, SBH4545 wrote:

    This article is so dead on, it's not even funny. While I am a HUGE advocate of individual responsibility, the fact still remains that MOST people don't understand the costs of their 401k plan. That, to me, means there is a need in this 'marketplace.'

    Thankfully, there are people out there who know about this and truly want to change it. The best way to fix these and the many other issues in 401k plans today is to use pre-built portfolios. They should be made up of all low-cost index funds, and reflect various risk tolerances and years to retirement. Employees should be counseled to select the one that matches THEIR risk and years to retirement, and SAVE, SAVE, SAVE as much as they can.

    Study after study shows index funds outperforming actively-managed funds IN THE LONG RUN (which is what we're looking at, for the most part, when discussing retirement savings).

    Check out is a plan out there for sale if only plan sponsors would pay attention to this stuff. They can AND SHOULD save their employees TENS OF THOUSANDS OF DOLLARS in fees, and HELP them get invested correctly.

  • Report this Comment On May 15, 2014, at 12:21 PM, ERISANation wrote:

    If Fidelity has said to the opening example, you have $89,300 in your account, but if you were not charged a fee, you'd have $90,201. Rather than mandating this, we will get reams of reg's.

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