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Simple question - how do expense ratios work? Is there a fee that is calculated regularly, and the amount is taken out of my account? Is it subtracted from the funds earnings?

Context:

My work has recently changed the 401k setup. They will now be charging an annual $52 fee. But, they are offering a new basket of funds with relatively lower expense ratios. It seems like BS to me, but I'm trying to look at it objectively.... I need to understand how Expense Ratios really work.

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    Look up the expense ratios, before and after, and take the difference. You should have a number - something like (e.g.) 0.8%. Take the value of your investment portfolio, and multiply by that number. That's the savings the expense ratios have wrought. If that's more than $52, you win. (For my example number of 0.8%, a $6500 portfolio would break even.) The bigger the portfolio, the more a low expense ratio matters. – fennec Feb 22 '12 at 22:21
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It's reflected in the share price. For funds whose dividends are sufficient, as with SPY, the price reflects a fraction of the index, and the dividends are reduced slightly. For GLD the lack of a dividend means the costs are reflected in a price that lags the index (i.e. actual gold) by the expense ratio each year.

What expense ratios are your funds showing?

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You mention both 401K and mutual Funds. The prospectus will tell you how the expenses are charged. Some charge it on quarterly basis, others include it in the share price.

One of the big unknowns for most workers is the hidden cost of their 401K. It can be found, but I don't think most people look for it.

Note: $52 for an account with $16,500 deposited last year, would have an expense of less than 1/3 of 1%.

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    Right (about the $52) but Matt didn't mention what the expenses ratios are. The $52 is in addition to those fees. Add .33% to say 1% and you're talking 1.33% – JoeTaxpayer Jan 23 '12 at 4:15

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