By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
Fees reduce investment returns one for one, every year, and the lost dollars also stop compounding. A 1% annual fee on a portfolio earning 7% means you keep about 6%, and over 30 years that gap takes roughly a quarter of the ending balance. For a family investing seven figures, the difference between a 0.10% all-in cost and a 1.25% all-in cost can run past $1 million over two decades.
This guide is for high-income W-2 families in California and Washington, typically with two earners, RSUs, maxed 401(k)s and a growing taxable brokerage account. It shows which fees actually matter at your balance, how California taxes make one hidden cost larger than it looks, and a worked example you can adapt to your own numbers.
How fees affect investment returns: the math in one example
The U.S. Department of Labor gives a clean illustration. An employee with 35 years to retirement and a $25,000 401(k) balance, earning 7% a year with no further contributions, ends with about $227,000 if fees and expenses cost 0.5% a year. At 1.5% the balance is only about $163,000. The 1 percentage point difference cuts the retirement balance by 28% (DOL, A Look at 401(k) Plan Fees).
The same arithmetic answers a common search: what $100,000 invested for 30 years becomes. At a 7% gross return (a hypothetical, not a forecast), with no additions:
- 0.06% annual cost: about $748,500
- 1.00% annual cost: about $574,300
- 2.00% annual cost: about $432,200
The 2% investor pays far more than 2% of the money. They give up roughly 42% of the ending balance compared with the low-cost investor, because every dollar paid in fees in year one would otherwise have compounded for 29 more years. The SEC makes the same point: with an ongoing fee you lose the fee and also the return you would have earned on it (SEC Investor Bulletin, How Fees and Expenses Affect Your Investment Portfolio).
What a .06 expense ratio actually costs you
An expense ratio is the fund’s annual operating cost, taken out of the fund’s assets before returns reach you. You never see a bill. A 0.06% expense ratio means $6 a year for every $10,000 invested, or $600 a year on $1,000,000. A 0.75% actively managed fund costs $7,500 a year on the same $1,000,000. The fund’s reported return is already net of this cost, which is why it is easy to ignore.
The fees that add up at a seven-figure balance
Commissions are only one piece. For a family with $1 million to $5 million across accounts, these are the costs to find and total:
| Fee | Where it hides | What to look for |
|---|---|---|
| Advisory fee (percent of assets) | Deducted quarterly from your accounts | Form ADV Part 2A fee schedule; whether it applies to cash, 401(k) and RSU shares you simply hold |
| Fund expense ratios | Inside each fund’s return | Weighted average across all holdings, not just the headline fund |
| Sales loads and 12b-1 fees | Paid at purchase or yearly inside the fund | Share class letters (A, C) and the prospectus fee table |
| Wrap or platform fees | Charged on top of the advisory fee | A second line item on statements or in the advisory agreement |
| 401(k) plan administrative fees | Taken from participant balances | Your plan’s annual participant fee disclosure |
| Cash sweep spread | Low interest on uninvested cash | The sweep rate compared with a money market fund yield |
| Tax drag | Capital gain distributions and turnover in taxable accounts | Each fund’s history of year-end distributions |
Layering is the usual problem. A 1% advisory fee on top of funds averaging 0.60%, plus a 0.20% platform fee, is an all-in cost of 1.80% before taxes. Few families add those numbers together until someone does it for them.
Worked example: a $1.1 million California household over 20 years
Assumptions (all hypothetical): a married couple in San Mateo County, one a biotech scientist and one a physician, household W-2 income of $1.1 million, children ages 4 and 7. They have $1,500,000 invested across 401(k)s and a taxable brokerage account and add $100,000 a year from RSU sales and savings. We assume a 6% gross annual return for 20 years, contributions at year end, and look only at the all-in annual cost.
| All-in annual cost | Typical setup | Balance after 20 years | Shortfall vs 0.10% |
|---|---|---|---|
| 0.10% | Index funds, no advisory fee | about $8,360,000 | none |
| 0.60% | Low-cost funds plus a flat planning fee equal to roughly 0.50% | about $7,744,000 | about $616,000 |
| 1.25% | 1% of assets plus low-cost funds | about $7,015,000 | about $1,345,000 |
| 2.00% | 1% of assets plus active funds and a platform fee | about $6,264,000 | about $2,096,000 |
The question this table answers is not “are fees bad”. It is “what am I getting for each 0.10%”. Advice can pay for itself when it handles decisions that move real money for this family: a concentrated RSU position, a mega backdoor Roth that nobody set up, withholding that leaves a large April balance, an estate plan that names a guardian. It does not pay for itself when the fee buys only a portfolio of funds you could hold for a fraction of the cost.
Why California makes tax drag a bigger fee than it looks
In a taxable account, a fund that sells winners inside the portfolio passes capital gains to you at year end, whether or not you sold anything. For our reader those distributions are expensive:
- Federal: for 2026, long-term gains are taxed at 20% for married couples filing jointly with taxable income above $613,700, plus the 3.8% Net Investment Income Tax once modified AGI exceeds $250,000 (Rev. Proc. 2025-32; IRS, NIIT). Short-term gains are taxed as ordinary income, 37% above $768,700 of 2026 taxable income for joint filers, plus the same 3.8% NIIT.
- California: there is no lower rate for capital gains; they are taxed as ordinary income (FTB). Using the 2025 schedule (the latest published), a joint return with taxable income between $891,542 and $1,485,906 is in the 11.3% bracket, and the 1% Behavioral Health Services Tax is added on taxable income over $1,000,000 (FTB 2025 tax rate schedules). Our household, with roughly $1 million or more of California taxable income, faces a 12.3% marginal rate.
So in our example, a long-term gain distribution costs about 36.1% (20% + 3.8% + 12.3%). If $1,000,000 of the family’s money sits in the taxable account and an actively managed fund there distributes 1.5% in a year, that is $15,000 of gains and roughly $5,400 of tax, about 0.54% of that balance. That is a second expense ratio nobody prints on the fact sheet. Broad index funds and ETFs typically distribute far less, which is why fund location (what sits in the 401(k) versus the brokerage account) matters more in California than almost anywhere.
Washington families have no wage or dividend income tax in 2026, so the same distribution costs 23.8% federally. Washington’s capital gains tax (7%, and 9.9% on taxable gains above $1,000,000) applies to long-term gains from selling assets such as stocks, above an annual standard deduction ($278,000 for 2025, the latest published figure) (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (WA DOR), so households at the top of our income range should not plan on the current treatment lasting.
Are advisory fees tax deductible?
Not on the federal return. Investment fees and expenses are miscellaneous itemized deductions subject to the 2% floor, and the IRS states these are no longer deductible (IRS Publication 529). Fees paid from inside a traditional 401(k) or IRA come out of pre-tax money, which is a different mechanism from a deduction. Ask your CPA how California treats these expenses on your state return, since California does not always follow federal changes.
How to compare your 401(k) fees
There is no single “401(k) fee comparison chart” that covers your plan, because each employer negotiates its own lineup. What you do have is the annual participant fee disclosure your plan must provide, which lists each fund’s expense ratio and any plan-level administrative charges (DOL). Large employers in tech and biotech often offer institutional index funds at very low cost; a target-date fund in the same plan can cost several times more. For 2026 you can defer $24,500, and total additions including after-tax contributions for a mega backdoor Roth can reach $72,000 (IRS Notice 2025-67), so the fund choice inside the plan applies to a large share of your savings.
A 20-minute fee check for your household
- List every account: both 401(k)s, IRAs, brokerage, 529s, and any account at a bank or insurer.
- For each, write the advisory fee, the platform or wrap fee, and the weighted expense ratio of what you hold.
- Add them into one all-in percentage and one dollar figure for the year.
- In the taxable account, note last year’s capital gain distributions from your 1099-DIV.
- Next to the total, write what the advice actually did last year: specific decisions, not meetings.
Common mistakes
- Judging cost by the advisory fee alone. Fund costs and platform fees often add half again on top.
- Holding high-turnover funds in a California taxable account. The tax drag can exceed the expense ratio.
- Paying a percentage fee on RSU shares or cash that nobody is managing.
- Ignoring the default fund in the 401(k). Contributions often land there automatically.
What to write down for your kids
Children see a portfolio statement. They rarely see why you chose index funds, why you pay someone for advice, or what that advice is supposed to do. A one-page note with your all-in cost, what you pay for, and why, is the kind of reasoning that survives when the accounts change. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”
Frequently asked questions
Is a 1% advisory fee too high?
It depends on the balance and on what the fee covers. On $3,000,000, 1% is $30,000 a year, every year, and it grows with the portfolio. If that buys equity compensation planning, tax coordination and estate work that changes real decisions, it may be worth it. If it buys fund selection only, low-cost funds and a flat planning fee usually cost far less.
Are there other fees besides commissions I should watch for?
Yes. Expense ratios, 12b-1 fees, sales loads, wrap or platform fees, 401(k) administrative fees, low cash sweep rates and tax drag from fund distributions. At seven-figure balances, the percentage-based fees and tax drag usually matter much more than trading commissions, which many brokerages no longer charge for stock and ETF trades.
Next step
Run the 20-minute fee check above and put one all-in number on paper. If you want a second set of eyes on how fees, taxes and your equity compensation fit together, our investment and risk management work starts there, and the tax management side covers fund location and distributions. For more on pricing models, see how much a wealth manager costs and average management fees for financial advisors. For how compounding works in the other direction, see compounded daily vs monthly, and for retirement plan choices, retirement and employee benefits.
This article is general education, not individual advice. The right move depends on the family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Investment & Risk Management for high-income W-2 families at Bright Advisers.
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