After multiple rounds of interviews and writing tests, on May 31, 2012 I received a letter to work for my current employer. The letter outlined salary, healthcare, and other expected benefits, but one benefit stood out to me.  

“After a year’s tenure, the organization will provide an employer-sponsored SEP-IRA account (currently set at 10% of the employee’s salary).”

I figured this was some kind of retirement accounts. I had no idea what “SEP” meant. “IRA” sparked only the vaguest association with retirement. *

At that stage of my career I spent a lot more time thinking about how I would spend my income rather than how I would save it, so filed the benefit away and promptly forgot about it. 

A year later, in 2013, the VP of finance sent me a note confirming the SEP IRA was live with my new money manager, T.  Rowe Price.

New investors select how to invest their capital. My new provider offered a wide range stocks, bonds, and money market mutual funds. With my limited investment knowledge I had no idea which of the hundreds of options to choose.

By chance I had recently discussed the virtues of index fund investing with the family, so decided to choose the Equity Index 500 Fund, a T. Rowe Price index fund tracking the S&P 500. As an aside, McGraw Hill owns the S&P 500 trademark. For a company to label a fund with “S&P 500” requires a hefty licensing fee, so many funds allude to an association with the S&P index with a moniker like “large cap” or simple a reference to the number 500, but eschew the name. Institutional investors avoid the license fee to keep costs low for investors. 

Seven years later, this has been a terrific investment. Over that time, the S&P 500 rose almost 100 percent (with dividends reinvested). Most American stock investments over time period offer similar returns.

What about the fees?

What I was not sensitive to when I selected the fund was the expense ratio, or the cost paid to the company for managing my money. For the Equity Index 500 Fund, the expense ratio is 0.20 percent. In other words, for every $10,000 invested, T. Rowe Price takes $20. No matter if the markets go up or down, the company will always collect that 0.20 percent. 

0.20 percent is a low expense ratio. The average mutual fund expense ratio in 2018 was 0.55 percent. My fees are less than half that amount. That is encouraging. Tut for a person with a life efficiency strategy bordering on the idiosyncratic, I want to do better.

And it turns out, better very much exists. More funds are cutting expense ratios to attract new investors. After a bit of digging, my great rate of .20 percent seems embarrassingly high. Lets take a look at some of the contenders in the S&P 500 basket. 

Best S&P 500 Index Funds by Expense ratio

• Vanguard 500 Index Fund Investor Shares (VFINX): Vanguard is widely considered the pioneer of index investing. Its founder, John Bogle, was an early advocate for passive investments. The VFINX fund attempts to replicate the S&P 500 at an expense ratio of 0.14%. $14 in fees for every $10,000 invested. 

• Schwab S&P 500 Index Fund (SWPPX):  One of the more aggressive fund managers cutting fees to increase competitiveness. Schwab’s offering a 0.02% expense ratio on its S&P 500 fund. 2 bucks on every $10,000 invested.

• Fidelity 500 Index Fund (FXAIX): Like Schwab, Fidelity is also aggressively cutting costs on its funds. The Fidelity 500 Index Fund is a stunner with one of the lowest expense ratio for an S&P 500 fund at 0.015%. $1.50 for every $10,000 invested. 

• Fidelity ZERO Large Cap Index Fund (FNILX): As the name implies, the expense ratio on this fund is zero. The first index fund ever to completely eliminate the cost. For every $10,000 invested 0 dollars are paid in management fees. That’s pretty damn appealing.

You might be asking yourself why anyone would continue to invest in any other company if Fidelity offers zero fees. 

Why paying a fee might be appealing

Take a moment to compare the last two funds above. Both are sold by Fidelity. Both generally follow the same index (S&P 500). There are three differences between these two offerings: the expense ratio, inception date, and net asset value.

On the surface, cutting fees to zero sounds great. Investors receive an extremely diversified investment at a very low cost.

To offer some context, lets compare my .20 percent expense ratio to a zero percent ratio during an investment period from age 30 to 65. As a FIRE adherent, the length of time is laughably long, but lets review just for the sake of argument.

At regular market returns, eliminating even those small fees would equal enormous savings. Investing $10,000 per year in a zero-fee fund versus a fund with a 0.20 percent expense ratio from ages 30 to 65, you’d have an extra $140,000 simply by eliminating that tiny $20 per year per $10,000 in fees, based on stock market historical returns. 

Ok, so we’ve established that saving on the expense ratio adds up over time. What about the net asset value and the date of inception?

Fidelity’s zero free fund is still very small in comparison to its low cost competitors. And as discussed above, a new fund will not perfectly match the S&P 500. It is possible returns could deviate from the index a fund will track. For example, the Fidelity ZERO Large Cap Index Fund could post returns that are .20 percent higher or lower than the more established T. Rowe Price Equity Index 500 Fund I currently hold, which would eliminate the savings generated by the zero expense ratio.

A fund with an earlier inception date offers a track record to assess past performance. While past performance does not predict future performance, it offers a long period to review the calibration of the fund to the index it means to track. Fidelity’s zero fee fund offers less than a year of data to assess, increasing some minor risk of deviation.

Conclusion

So we’ve found some funds out there that have an appealingly low expense ratio, some finds even completely eliminated the ratio. There is certainly some moderate risk in investing in a new product with limited track record. However, after the Fidelity ZERO Large Cap Index Fund passes the one-year mark in October I’ll take a look at how closely it tracked the S&P 500. If it was within .10 percent, I’ll likely move everything from T. Rowe Price to Fidelity.

*SEP stands for “simplified employee pension.” Calling it “simplified is pretty accurate. A SEP IRA is a basic retirement account. SEP IRA contributions are tax-deductible, and investments grow tax-deferred until retirement, when the money taken out is taxed as income.