Fund Expense Ratio

The Fund Expense Ratio in the context of the 401(k) industry refers to the total percentage of fund assets used for administrative, management, advertising, and all other expenses. An expense ratio is an annual fee expressed as a percentage of your investment — or, as the term implies, the ratio of your assets that go toward expenses.

For example, an expense ratio of 0.6% per year means that each year 0.6% of the fund's total assets will be used to cover expenses. If your investment in the fund is $10,000, for instance, you would pay about $60 annually.

The expense ratio doesn't come out of your account directly. Instead, it's deducted from the return you're quoted — it's already been subtracted by the time you see what your fund returned for the year.

Expense ratios matter because they can significantly affect both the total return and long-term growth of your investment. A high expense ratio will erode returns over time. Therefore, for 401(k) participants, it's important to be aware of the expense ratios of the different funds options within their 401(k) plan.