Foregone Earnings: What They Are and How Fees Erode Investment Returns

What are foregone earnings?

Foregone earnings are the difference between the returns an investor actually receives and the returns they would have earned in the absence of fees, sales charges, or other costs. In practice, foregone earnings represent the portion of investment gains surrendered to expenses such as management fees, sales loads, redemption fees, and administrative costs.

Key points

• Foregone earnings = actual earnings − earnings without fees.
• They are a form of opportunity cost: money lost by choosing higher-cost investments or incurring unnecessary charges.
• Small ongoing fees can compound into large shortfalls over time.
• Common sources include sales charges (loads), fund expense ratios, and redemption or transaction fees.

How fees reduce long‑term returns

Fees are charged by mutual funds, ETFs, brokers, and intermediaries. Because investment returns compound, even modest annual fees can significantly reduce long‑term growth. Passively managed funds and many ETFs typically carry lower expense ratios than actively managed mutual funds, which helps limit foregone earnings.

Types of fees and how they contribute to foregone earnings

Sales charges (loads)
* Front‑end load: a percentage charged when you buy shares (reduces the amount actually invested).
* Back‑end load: a percentage charged when you sell shares.
* Deferred/contingent deferred sales charge (CDSC): a back‑end charge that declines the longer you hold the fund and may eventually reach zero.
* Breakpoint discounts: larger investments may qualify for reduced sales charges; researching these can lower foregone earnings.

Example (sales charge effect)
* If a fund reports a return of −25.0% without sales charges but −29.3% with charges, the 4.3 percentage‑point difference is foregone earnings attributable to sales charges.

Fund operating costs (expense ratios)
* Expense ratios combine management, distribution, transaction, and administrative fees.
* Gross expense ratio shows stated costs; net expense ratio may reflect temporary waivers or reimbursements and can rise to the gross ratio later.
* Passively managed funds generally have lower expense ratios than actively managed funds.

Example (expense ratio effect)
* With $10,000 invested: a 0.5% fee costs $50 per year; a 2.0% fee costs $200 per year. The higher‑fee fund therefore causes $150 in foregone earnings annually, before accounting for compounding.

Redemption and transaction fees
* Redemption fees discourage short‑term trading and cover transaction costs; they reduce proceeds when you sell within a specified period.
* Frequent trading or paying redemption fees increases foregone earnings.

How to reduce foregone earnings

• Favor low‑cost funds and ETFs, especially for long‑term holdings.
• Compare gross vs. net expense ratios and understand any fee waivers or caps.
• Avoid unnecessary sales loads by buying through discount brokers or directly from fund companies when possible.
• Qualify for breakpoint discounts if making large, concentrated investments.
• Minimize trading and avoid short‑term holding periods that trigger redemption fees.
• Consider tax‑efficient strategies, since taxes can also act like a fee on returns.

Conclusion

Foregone earnings are an important but sometimes overlooked drag on investment performance. By understanding the types of fees that create foregone earnings and taking steps to minimize them—choosing lower‑cost funds, avoiding unnecessary sales charges, and limiting trading—investors can retain more of their returns and improve long‑term outcomes.