Millennials have something that everyone saving for retirement covets: Time.

Time is on their side in almost every way related to building wealth. With 30 to 40 years until retirement, the generation born after 1980 has plenty of time to put money aside and for savings to compound and grow. But time can also be a huge drain on this generation’s financial well-being.

A new NerdWallet analysis of how investment fees can eat into the future savings of today’s millennial investors found some staggering numbers. Just like the accelerating effect compound interest has on the growth of savings, the same thing happens — only in the opposite direction — when investment fees compound.

The double blow of investment fees

The impact of fees is twofold: An investor pays an ever-increasing amount in fees as account balances grow, because the fees are based on a percentage of assets. And fees also strike a blow to the portfolio’s returns. That’s because every dollar taken out to cover management costs is one less dollar left to invest in the portfolio to compound and grow. So in addition to paying potentially hundreds of thousands of dollars in avoidable fees, our research shows that an investor gives up many times that amount in lost portfolio returns over time.

The cost of hidden fees is one of the drivers behind the Labor Department’s new fee-disclosure rule, designed in part to give consumers better clarity about how much they’re paying in fees. But understanding the impact of fees — especially slight differences between similar products — is still up to consumers.

Key findings

To examine the effect of fees on a millennial investor, we looked at different investing scenarios for a 25-year-old who has $25,000 in a retirement account, adds $10,000 to the account every year, earns a 7% average annual return and plans to retire in 40 years.

• In one of the scenarios analyzed, paying just 1% in fees would cost a millennial more than $590,000 in sacrificed returns over 40 years of saving.
• A millennial with the option of investing in either of two commonly held funds can save nearly $215,000 in fees — and, through the magic of compounding, retire nearly $533,000 richer — by choosing the one with fees that are 0.93% lower.
• By assembling a low-cost exchange-traded fund, or ETF, portfolio on his own and rebalancing it once a year, a millennial can retire $345,000 richer than if he uses a target-date mutual fund.
• Outsourcing portfolio management to a robo-advisor could be a less work-intensive alternative to self-managing and less costly than a target-date mutual fund. In our scenario, using a robo-advisor would cost $232,000 in fees over 40 years, about half the $454,000 a target-date mutual fund would cost.

How the cost of fees accelerates over time

We started our research by looking at how fees fester in a single mutual fund invested in a diversified mix of midsize companies; mid-caps, in Wall Street parlance. To show the impact of fees over time, we used a zero management-fee investment as the baseline for this comparison.

Mutual funds are a staple in many portfolios, including employer-sponsored plans such as 401(k)s. The example below is based on a mid-cap mutual fund with a 1.02% expense ratio, or management fee, that, according to fund-tracker Morningstar, is below average for funds categorized as U.S. mid-cap equity blend.

» Learn more: Understand the different types of mutual funds

Because the 1.02% investors pay annually is taken out as a percentage of the portfolio’s value, the larger the portfolio, the more an investor pays, as shown in this table:

As is true for every investor, regardless of age, there’s an opportunity cost associated with taking money out of a portfolio to cover fees. The table above shows how the additional decades millennials have to invest amplifies the effect.

Even though the investor continues to get the same 7% average annual return, our analysis shows the percentage of value lost to fees climbs higher as the years pass. In this example, from ages 45 to 65, the loss to fees increases from 12% to over 25%. In all, over the course of 40 years, the impact of fees is more than $592,000.

» What’s the cost? Mutual fund fees investors need to know

Fees will take a toll out of any investor’s portfolio. That acceleration in costs as a portfolio grows is a reminder that Gen Xers and baby boomers should also pay close attention to fees. But millennial investors, who’ve come of age in an era in which low-cost investing products have taken off, can, with a little work, avoid the toll of investing fees far earlier.

“Everyone talks about the benefits of compounding interest, but few mention the danger of compounding fees,” says Kyle Ramsay, NerdWallet’s head of investing and retirement.

“We would not suggest only looking at fees when making investment decisions,” he says. “However, consumers need to think carefully about what they hope to get from an investment service or product, and whether that benefit is worth the fees. As illustrated, 1% versus 0.5% may not feel like much over the course of a year, but when saving for retirement, it could mean the difference between retiring at age 70 versus retiring at 73.”

A millennial’s best defense: Scrutinize actively managed mutual funds

Unlike actively managed mutual funds — where human money managers are in charge of picking stocks and making the buy, sell and hold decisions — index funds and index-based ETFs are programmed to mimic a benchmark index. In an index fund, stocks are bought and sold based on their proportional size in a particular stock market index, such as Standard & Poor’s 500 index. ETFs are index funds chopped up into bite-sized shares that trade like stocks.

» Prefer active management?  Best performing mutual funds

Since index mutual funds forgo the salaried and staffed human element, they cost a lot less to run than actively managed funds, as shown in this side-by-side comparison of expense ratios:

Paying more for a mutual fund that is actively managed would be justified if these funds consistently outperformed their index-based peers. But studies, such as those by the S&P Dow Jones Indices, show that over five- and 10-year periods about 80% of actively managed funds underperform market-indexed funds and ETFs — often by margins that are nearly identical to the extra fees charged by managed funds.

The good news for millennial investors: the number of ETFs grew from 80 to over 1,400 from 2000 to 2014, according to the Investment Company Institute 2015 Factbook. The growing availability of low-fee alternatives gives millennials a significant edge.

A millennial can retire $533,000 richer by shaving 0.93% in fees from a portfolio

We compared the actively managed mid-cap fund with a lower-fee alternative, an ETF that offers similar exposure to midsize companies. The main difference between the two funds is that the ETF has a 0.09% expense ratio — 0.93% less than what the actively managed fund charges in management fees.

We used the same assumptions: a $25,000 initial investment, $10,000 added annually and a 7% average annual return over 40 years. As you can see, the 0.93% difference in fees adds up over time:

The table below shows that by choosing the lower-cost ETF, the millennial investor retires with $533,000 more in his account ($2.30 million versus $1.77 million) and instead of losing 25% of the portfolio’s value to fees, the damage is limited to just 2.5%.

A smidgen of a difference — just 0.93% — saves our investor almost $533,000 in fees and boosts after-fee returns 30% by retirement.

Of course, a single mutual fund or ETF is not a full-fledged retirement portfolio. A well-balanced retirement portfolio should have exposure to multiple asset classes (stocks, bonds, cash) and multiple variations of each (domestic, international, growth, value and so on). Over the years, the composition of a portfolio needs to change to reflect the investor’s timeline until retirement and risk tolerance.

The growing availability of index tracking investments means an investor can assemble a low-fee portfolio. But building, managing and monitoring a portfolio isn’t for everyone, and newer investment products such as target-date mutual funds and robo-advisors make it easy to outsource portfolio management. NerdWallet crunched the numbers to see how the three investing strategies stacked up for a millennial.

Self-managed portfolio vs. target-date fund vs. robo-advisor

Using the same assumptions (a $25,000 initial investment, $10,000 additional annual contributions, 7% average annual return, retiring in 40 years), we compared the three main low-cost investment options available to consumers:

A self-managed index-based portfolio is within any investor’s reach with tools like Morningstar and NerdWallet’s 401(k) fee analyzer, which can help identify hidden fees in a 401(k) plan and suggest options to possibly roll over to a self-directed retirement account with lower-cost funds. Using this strategy, the investor is in charge of picking investments, deciding on allocation amounts and positions, placing — and paying for — trades, rebalancing the portfolio and staying up to date on any fee changes in the funds in the portfolio. Since investment options in a 401(k) are often limited, investors who have 401(k)s from previous jobs should consider rolling over to a no-fee IRA that offers lower-cost funds. For our comparison we assumed a 0.15% average expense ratio for the do-it-yourself investor’s portfolio and factored in $50 in trading costs (or eight trades at $6.25 each) per year.

Target-date funds state a specific year for the investor’s targeted retirement, and the portfolio is automatically rebalanced through the life of the investment. However, this convenience comes at a cost. For our comparison, we based fees on a popular 2055 target-date retirement fund (appropriate for an investor with a 40-year retirement date) with a 0.75% expense ratio.

Robo-advisors, like Wealthfront and Betterment, are another increasingly popular option. Robo-advisors manage your money via computer algorithm, generally investing in low-cost ETFs. These companies will build a portfolio based on your goals and timeline, then rebalance it as needed. Many offer tax-loss harvesting on taxable accounts, which can save investors a substantial amount of money. An investor pays two fees with a robo-advisor: The expense ratio on the ETFs chosen for the account and a management fee (which generally falls at or below 0.25%). All told, an investor could end up paying about 0.35% to 0.40% for a managed portfolio. We based our comparison on a 0.37% average annual expense ratio.

The table illustrates the differences in investment options for a millennial saving for retirement:

A millennial who puts in the elbow grease to manage her own ETF portfolio will retire $123,000 to $345,000 richer than if she outsources the work, assuming she does a similar job of managing the account and can get the same returns.

However, not all savers are the hands-on type. Based on our comparison of model portfolios over time, in this scenario, a robo-advisor is the next-best choice in terms of keeping costs down and being less exposed to the ravages of fees, as shown in the table below:

While the returns are 5.5% less than you would get with a self-managed portfolio, that’s a far cry from the at least 15.3% that you would lose to a target-date mutual fund.

How to find excessive fees in your portfolio

To know if your portfolio is infested with fees, first you have to find them. (See Understanding Investment Fees: From Brokerage Commissions to Sales Loads for guidance.) The next step is to identify lower-cost replacement investments. These tools can assist:

• NerdWallet’s 401(k) fee analyzer tool, in partnership with FeeX, analyzes your 401(k) to identify hidden fees, including higher-than-necessary expense ratios. It also provides recommendations for lower-fee alternatives within your existing plan or potential rollover destinations with more investment options.
• Morningstar’s Fund Screener allows you filter funds by category, and sort by expense ratio. Some features require a membership but some local libraries offer access.
• FINRA has a fund analyzer tool, offering details on more than 18,000 mutual funds, ETFs and exchange-traded notes (ETNs).
• NerdWallet’s retirement calculator measures all factors — from portfolio returns to extra savings and tweaks to retirement age — and shows how those changes affect an investor’s retirement readiness.

All investors, regardless of age, should audit their portfolios regularly and identify fees to mitigate damage to their returns. This should be done annually; or, better yet, when quarterly account statements arrive. Making sure every dollar possible goes toward building a long-term portfolio, and not padding an investing tab, is worth hundreds of thousands of dollars over time.

Methodology

We looked at different investing scenarios for a 25-year-old who has $25,000 in a retirement account, adds $10,000 to it every year, earns a 7% average annual return and plans to retire in 40 years.

Here’s how we calculated the scenarios for an investor with a ETF vs. mutual fund

Returns calculated assuming:

• Fee charged = expense ratio x [(ending balance + beginning balance)/2]
  • Mid-cap index fund ETF fee = 0.09%
  • Actively managed mid-cap mutual fund fee = 1.02%

Here’s how we calculated scenarios for investors who manage their own portfolios vs. robo-advisor vs. target-date fund

Returns calculated assuming:

• Fee charged = expense ratio x [(ending balance + beginning balance)/2]
  • Rebalance yourself fee = 0.15%
  • Robo-advisor fee = 0.37%
  • target-date 2055 fund fee = 0.75%

$50 in annual trading costs were added to the rebalance yourself portfolio

Here’s how we calculated fee impact

The total impact of management fees is calculated as:

• Fee drag = [zero-management fee portfolio value – after-fee portfolio value]/zero-management fee portfolio value

Dayana Yochim is a former NerdWallet authority on retirement and investing. Her work has been featured by Forbes, Real Simple, USA Today, Woman’s Day and The Associated Press. Jonathan Todd formerly worked as a data analyst at NerdWallet.