When looking for low expense-ratio funds (specifically Target Date funds), they all seem to be one of two options:

  • No transaction fees and high expense ratio (Example: AREVX $0 transaction, %.98 expense ratio)
  • High transaction fees and low expense ratio (Example: VTTSX $76 transaction, %.18 expense ratio)

My question is - when would one be beneficial over the other? Do transaction fees generally apply for automatic investing after buying into the fund? If so, this would mean regular fees, which would add up quickly, otherwise, if the transaction fees tend to be one-time, then this could be beneficial over a longer period of time.

  • Target date funds are often bought in retirement plans such as 401k's and IRAs. If you are investing in such tax-deferred vehicles, there is no reason to invest through a brokerage. All 401k plans that I know of allow direct investment in mutual funds, and the funds usually waive their minimum investment policies (e.g. $1000 minimum to open, $100 minimum for each additional investment) so that e.g. $37.50 per pay check can be invested without paying a $76 transaction fee each time. For an IRA, open an IRA at Vanguard and invest directly with them rather than through your broker. Commented May 31, 2012 at 0:44
  • @DilipSarwate I'm researching for my 401k, which I'll open when I start my job next month, but also for my Roth IRA, which I have through my brokerage account - which is the one showing the fees. Would it be better to not have an IRA through a broker like schwab?
    – xdumaine
    Commented May 31, 2012 at 1:37
  • As far as the IRS is concerned, you have one IRA, but it can be invested in different accounts with different custodians. So you can have an IRA account with Schwab and invest in stocks if you like, and other IRA accounts with Vanguard as well as other mutual fund companies and invest with them in their best accounts. Some people like to have everything on one screen and in one single account. If you are one of those, by all means invest solely through Schwab. Just be prepared to pay for the convenience. Commented May 31, 2012 at 3:12

1 Answer 1


It appears that you have been looking for funds through a broker's interface or web site. The transaction fee is one that is being charged by that broker, not by the mutual fund you are buying. (The broker is probably receiving a payment from the high-expense fund and so it eliminates its charge in that case in order to promote that fund. The fund can afford the payment via the higher expenses.)

If you deal directly with the mutual fund you usually will not be charged transaction fees. The Vanguard VTTSX fund you mentioned for instance, shows on its web page that there is no purchase or redemption fee. It's good to read the Prospectus, though. It shows that there is a $20 account service fee each year if the balance is less than $10,000.

And yes, it is important to consider all charges when deciding on an investment. If you invest $1000, the broker's $76 fee is 7.6%, on $10,000 is .76% both of which are substantial parts of your return. Also, the broker probably will charge a fee for getting your money back.

Since some costs are one time but some are continuing (like the expense ratio), you should compare by choosing some likely values and working out the results. E.G., you might think of putting $10000 in, have say a 5% per year investment return less the expenses, and see what you would have after redeeming your investment in 45 years, 10 years, and 2 years (in order to get a feel for the effect of different scenarios).

  • 3
    "We charge a $20 annual account service fee for each Vanguard fund with a balance of less than $10,000 in an account. This fee doesn’t apply if you sign up for account access on Vanguard.com and choose electronic delivery of statements, confirmations, and Vanguard fund reports and prospectuses." They just want to recover postage costs, really.
    – user296
    Commented May 31, 2012 at 0:21

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