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Understanding investment fees

Mutual funds make up roughly half of our retirement savings in Canada, according to the Investment Funds Institute of Canada. But what most Canadians don't realize is that when it comes to mutual funds, fees can eat up a large portion of your retirement nest egg.

Canadians pay some of the highest mutual fund fees in the world. And a big part of this is the management expense ratio (MER), the amount you pay to manage the fund. The average MER was 2.06% in 2011, and it's taken regardless of whether your funds make -- or lose -- money.

To show how MER fees can affect your return, we looked at the effect on an investment of $50,000 over a 25 year period. Using an average 6% return (a standard long-term return), we calculated how much an MER of 2.5% -- which is fairly common - would cost over a 25 year period.

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Without the fee, the fund would grow to $214,000; with it, the investment only grows to $114,000. While 2.5% may seem like a very small amount, it can actually mean a difference of $100,000 - almost half of the potential value of your investment. 

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To avoid paying too much in fees, compare MER rates when looking at funds, and ask about lower-fee mutual funds or exchange-traded funds (which come with much lower management fees, averaging 0.42% in 2011).

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