Direct answer: Teen investment fees matter more than for adult accounts because the compounding horizon is longer. A 0.03% expense ratio on a broad index fund is appropriate for a teen's Roth IRA or UGMA/UTMA. An expense ratio of 1% per year on a $5,000 Roth IRA reduces the 50-year terminal value by roughly 40% compared to a 0.03% fund (all else equal). For the 529 plan, compare total costs including administrative fees and underlying fund expense ratios; the best plans offer index options at 0.10%-0.20%. Most major brokerages charge no trading commission for ETFs and stocks.
Fees for Teen Investors: Expense Ratios, Commissions and 529 Administrative Costs
Key Takeaways
- Expense ratios compound against the investor over time. A 1% higher annual expense ratio on a 50-year account reduces the terminal balance by roughly 40%.
- Broad index funds with expense ratios of 0.03%-0.10% are appropriate for a teen's Roth IRA and UGMA/UTMA. Expense ratios above 0.50% for index-style funds should be avoided.
- 529 plan total costs include the underlying fund expense ratios plus any state administrative fee. Many top plans offer index fund options at 0.10%-0.20% total annual cost.
- Most major brokerage platforms charge $0 commission for ETF and stock trades. Commissions are not a material cost for teen accounts at major platforms.
- Advisor-sold products and proprietary funds with high expense ratios or sales loads are the most common source of excessive fees in teen investment accounts.
Why Fees Matter More for Teens
A fee's impact on a portfolio grows with the time horizon. An expense ratio of 1% per year reduces a $5,000 investment's 50-year balance by roughly 40% compared to a 0.03% fund, assuming the same gross return. For a 40-year account, the same 1% drag reduces the terminal balance by roughly 33%. The earlier the investment, the larger the fee's absolute impact in dollars.
This makes fee selection one of the highest-leverage decisions in a teen's investment setup. Choosing a broadly diversified index fund with a 0.03% expense ratio over an equivalent actively managed fund at 0.75% is a decision that compounds for 50 years.
Expense Ratios for Roth IRA and UGMA/UTMA
The primary fee in a brokerage account is the expense ratio of the funds held. For a teen's long-term accounts, the appropriate choice is a broadly diversified, low-cost index fund or ETF:
- Total US Market or S&P 500 index fund: 0.03%-0.05% at major providers
- Total World or Global Market index fund: 0.07%-0.10% at major providers
- Actively managed funds: 0.50%-1.50% or more, with no consistent evidence of long-run outperformance
The 0.03% benchmark used by the lowest-cost providers is the relevant comparison. A fund charging 0.50% costs 16 times more per year than the benchmark. Over 50 years, that difference is substantial in absolute terms.
529 Plan Fees
529 plan costs have two components: administrative fees charged by the state plan and the expense ratios of the underlying investment options. Some plans charge an annual account maintenance fee (often $15-$25 or waived above a balance threshold). The more significant cost is the underlying fund expense ratio.
The best-value 529 plans offer index fund options with total annual costs (plan fee plus fund expense ratio) of 0.10%-0.20%. Advisor-sold 529 plans typically carry higher costs through load fees or higher-expense funds. A family that purchased an advisor-sold 529 several years ago should compare its total annual cost to the lowest-cost direct-sold plan available in any state (529 plans are not required to use the home state's plan).
Trading Commissions
Most major US brokerage platforms (Fidelity, Vanguard, Schwab, and others) charge $0 commission for online trades of US-listed stocks and ETFs. This makes commission a non-factor for teen accounts at these platforms. Some platforms still charge per-trade fees for certain mutual funds, options, or non-US-listed securities. A teen buying a broad index ETF once per month at a major platform incurs no trading commission.
Frequently Asked Questions
What is a good expense ratio for a teen's investment account?
A broadly diversified total market or global index fund with an expense ratio of 0.03% to 0.10% per year is appropriate for a teen's long-term investment accounts. Expense ratios above 0.50% per year should be avoided for index-style funds. Actively managed funds with expense ratios of 0.75%-1.50% or more reduce compounding significantly over the 50-year retirement horizon and are generally not appropriate as a core holding in a teen's accounts.
What fees are typical in a 529 plan?
529 plan fees include the expense ratios of the underlying investment options, plus sometimes a state administrative fee or account maintenance fee. Total costs vary by state plan and investment option. Many of the best 529 plans offer index fund options with total costs of 0.10%-0.20% per year. Advisor-sold 529 plans may carry additional load fees or higher expense ratios. Compare the total cost of the investment options, not just the plan's stated administrative fee.
Do brokerage commissions apply to teen investment accounts?
Most major brokerage platforms no longer charge per-trade commissions for stocks and ETFs. A teen's custodial Roth IRA or UGMA/UTMA account at a major no-commission brokerage incurs no trading fee when buying broad index ETFs. Some platforms charge commissions for options trades or certain specialty products. Mutual fund transaction fees vary by platform. For a teen buying broad index ETFs or mutual funds, commissions are generally $0 at major brokerages.