Mutual Fund Fees: How to assess and evaluate fees between funds

I sat down this morning to take a look at JOG’s IRA account, she recently rolled some money over from an old employer’s 401K plan. It was time to figure out how to integrate this “new” money into our existing portfolio without exposing us to too many mutual fund fees.

Most of our retirement savings sit in target date mutual funds. Target date funds are a relatively new type of mutual fund classification designed to provide a simple investment solution through a portfolio with an asset mix that becomes more conservative as the target date (usually retirement) approaches. See Wikipedia’s article on target date funds for more info.

I knew which fund I wanted to place the money into but found myself with a bit of a dilemma. Our IRA accounts are through Fidelity, but the fund I wanted to purchase is managed by Vanguard; Fidelity charges a $75 transaction fee when purchasing anything outside of their “family” of funds. This would turn out to be only one of several mutual fund fees I would need to evaluate.

My problem was this: the Vanguard fund I wanted to purchase would include a $75 transaction fee but had an overall lower expense ratio than the equivalent Fidelity target date fund (which would have no transaction fee but a higher expense ratio). Was paying the $75 transaction fee to get the Vanguard fund worthwhile when considering the expense ratio of the Fidelity fund? Luckily this is nothing that a little spreadsheet work can’t answer for us.

In this particular case it turned out that, over an expected 27 year holding time and given the difference in expense ratios (0.19% to 0.80%) it was a far better idea to pay the $75 transaction fee now. Assuming an annualized return of 6.00% (the historical return of the S&P500, excluding dividends, is 7.2%), we’ll save over $1,900 by using the Vanguard fund. It is AMAZING how much of a difference expense ratios make. Keep an eye on those things, folks, as well as the rest of the mutual fund fees out there.

The spreadsheet I made to solve this problem can handle several types of mutual fund fees typical of today’s funds. I’ve placed a public version of the spreadsheet up on Google Documents: Mutual Fund Fees Effect.

Mutual fund fee spreadsheet

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