Could Fees Cost Millennials $590,000 in Retirement Savings?

That’s the claim of a blog post titled, “How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings.” It notes that for Millennials, “time is on their side in almost every way related to building wealth.”

But “almost” is a key caveat – because the report by personal finance site NerdWallet notes that “time can also be a huge drain on this generation’s financial well-being.”

So, how exactly does that happen?

Well, many probably won’t read past the headline, but the assumptions employed by the blog’s authors, NerdWallet staff writer Dayana Yochim and data analyst Jonathan Todd, were pretty straightforward, if a bit large in some regards:

  • a $25,000 initial investment (though who starts with that?);
  • $10,000 added annually (as though a worker starting out, making, say $40,000 to $50,000 a year would be likely to set that much aside); and
  • a 7% average annual return (ah, the good old days) over 40 years.

They then applied these assumptions to some different scenarios. The one responsible for the $590,000 gap involved assuming an investment in an actively managed mid-cap fund with an expense ratio of 1.02%, contrasted with an ETF that they claim offered “similar exposure” to midsize companies. The main difference, according to NerdWallet, was that the ETF had a 0.09% expense ratio (so they’re assuming no difference in returns).

Now, setting aside the questions of true comparability between the fictional fund and the ETF, if you only took the difference in the fees, you wouldn’t get to the $590,000. NerdWallet also sees those fees as money that would reduce the amount of money you had to invest – and thus compounds the difference over time (think of it as the evil magic of compounding, or what the blog’s authors call “the danger of compounding fees”). When the dust has settled on the application of their assumptions… there’s a $592,798 difference in ending account value,1 with a 25.1% “value lost to fees.”

Do-It-Yourself ‘Savings’

Having planted that flag, the report takes the same set of assumptions (that $25,000 initial investment, $10,000 additional annual contributions, 7% average annual return, retiring in 40 years), and compares the use of a “self-managed index-based portfolio” where the individual did their own investing (and, lest we don’t pick up on the authors’ biases, they note that, “Since investment options in a 401(k) are often limited, investors who have 401(k)s from previous jobs should consider rolling over to a no-fee IRA that offers lower-cost funds”). For this particular comparison, NerdWallet assumed a 0.15% average expense ratio for the do-it-yourself investor’s portfolio and factored in $50 in trading costs (or eight trades at $6.25 each) per year.

Here the “…Millennial who puts in the elbow grease to manage her own ETF portfolio will retire $123,000 to $345,000 richer than if she outsources the work,” according to NerdWallet – oh – elbow grease and another key assumption, that “she does a similar job of managing the account and can get the same returns.” Ya think?

The authors are willing to concede that not all savers are the “hands-on type” (setting aside without comment their probable inability to actively manage their portfolio), NerdWallet then contemplates a comparison between target-date funds (a “popular 2055 target-date retirement fund” appropriate for an investor with a 40-year retirement date) with a 0.75% expense ratio, and a robo-advisor option. Here they conclude that using a robo-advisor (working with an ETF portfolio, for which a combined expense ratio and management fee they assumed a 0.37% average annual expense ratio) would cost $232,000 in fees over 40 years, about half the $454,000 their TDF pick (and associated assumptions) would cost. Once again, the only difference in this fantasy laboratory is the assumptions on fees – and on the skills, time, and interest of an individual investor to make investment choices equal to those of the alternatives presented. After that, of course – it’s just math.

Why go through this mathematical “exercise”? Well, while NerdWallet is a free site, it has skin in the game: It makes its money by matching users with financial products and services.

The message here is easy enough to read – those who do it themselves can save themselves some money, and in some cases, a lot of money – by relying on their own “expertise.” That is, of course, assuming they both have the time and tools to do so, with the discipline and skill of a professional. Those are pretty big assumptions, of course – arguably at least as large and out of touch with reality as the numeric assumptions deployed by NerdWallet.

Not that there’s any “magic” in these numeric assumptions, of course – it’s really just math. But it’s math with an outcome that seems not only driven, but arguably magnified by them.


  1. The blog provides a handy calculator so that you can replicate their math. If you start with $0 (as I assume most would), assume $5,000 in annual contributions, and a 3% return over 40 years – well, the difference, according to their assumptions, is just under $70,000. Not an insignificant sum, but not $590,000, either.

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