Newbie question.... calculating ER?

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vaught
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Newbie question.... calculating ER?

Post by vaught » Wed Aug 23, 2017 8:52 am

The ER of the fund (Vanguard target date) I have chosen in a retirement account is only 0.09.

However, the provider charges an administrative fee of $4.25 per month.

What would the true ER be after taking into consideration the monthly fee? Is it ($4.25 x 12 = 0.51 + 0.09) = 0.6?

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Taco Knight
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Re: Newbie question.... calculating ER?

Post by Taco Knight » Wed Aug 23, 2017 9:39 am

That would depend on your total balance. The $4.25 or $51 is flat. ER (.09) is a percent, so it's .09% which is not directly comparable to .51 or whatever other ways you've moved the decimals. Calculate your actual ER from a % to raw $, then add $51 and redo the math. Impossible to know without your balance, which is what the ER is a % of.

For instance, $1000 in your account, ER of .09 = $90/year. Fees of $4.25/month, = $51/year. 51+90 = $141. You're thus paying ER+fees 1.41%.
But, with $2000, your ER is $180/year and the fees stay the same, so with total fees and ER paid as $231 is higher but the percentage relative to your account is lower, 1.155%.

The higher your balance the closer to the percentage charge your total fees will be. That's why most on the board discuss ER the most, as $51 a year is increasingly trivial. The more money in your account, the closer the stated ER will be to your "true ER" you're looking for.
Last edited by Taco Knight on Wed Aug 23, 2017 9:46 am, edited 4 times in total.

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welderwannabe
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Re: Newbie question.... calculating ER?

Post by welderwannabe » Wed Aug 23, 2017 9:42 am

You are lucky. My plan charges a percentage based fee for administration. .38%.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

vaught
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Re: Newbie question.... calculating ER?

Post by vaught » Wed Aug 23, 2017 9:46 am

Thanks Taco Night.

That's good news. It's a brand new account that will increase by $1,500/month so that fee should be fairly nominal really soon.

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Taco Knight
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Re: Newbie question.... calculating ER?

Post by Taco Knight » Wed Aug 23, 2017 9:48 am

Oh, yeah, in that case, it'll basically disappear to within a rounding error.

cas
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Re: Newbie question.... calculating ER?

Post by cas » Wed Aug 23, 2017 10:29 am

Taco Knight wrote:
Wed Aug 23, 2017 9:39 am
For instance, $1000 in your account, ER of .09 = $90/year. Fees of $4.25/month, = $51/year. 51+90 = $141. You're thus paying ER+fees 1.41%.
But, with $2000, your ER is $180/year and the fees stay the same, so with total fees and ER paid as $231 is higher but the percentage relative to your account is lower, 1.155%.
BTW, an ER of 0.09 on $1000 is $0.90 per year, rather than $90/year.

So the calculation would be...

For instance, $1000 in your account, ER of .09 = $1000*(.09/100) = $0.90/year. Fees of $4.25/month, = $51/year. 51+0.90 = $51.90. You're thus paying ER+fees = 51.90/1000 = 5.19% = total ER of 5.19

But, with $2000, your ER is $2000*(0.09/100) = $1.80/year and the fees stay the same, so with total fees and ER paid as 51 + 1.80 = $52.80 is higher but the percentage relative to your account is lower, 52.80/2000=2.64% = total ER of 2.64


Unless I'm having a bad math day, which certainly isn't beyond the realm of possibility.

Taco Knight's larger point is correct, so this falls somewhat into the realm of the math police, but since the OP self-identified as a newbie, I thought I would mention it. (And if I'm having a bad math day, I'm sure it will be pointed out to me shortly.)

For more info, see "How to convert mutual fund expense ratio to dollars?" viewtopic.php?t=102313

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Taco Knight
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Re: Newbie question.... calculating ER?

Post by Taco Knight » Fri Aug 25, 2017 9:35 am

cas wrote:
Wed Aug 23, 2017 10:29 am
BTW, an ER of 0.09 on $1000 is $0.90 per year, rather than $90/year.
Thanks! I forgot whether I was already moving the decimal making a regular number into a percent and didn't even give the numbers a sniff test.

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