An expense ratio is what a fund charges to run itself, stated as a percentage of assets per year. A 0.05% expense ratio means $5 a year for every $10,000 invested. A 1.00% ratio means $100. The fee is never billed; it is skimmed from the fund's returns daily, so a fund that earned 8% before a 1% fee reports 7% to you.
The number looks small and the effect is not. Two investors put $100,000 into funds earning 7% before fees. One pays 0.05%; the other pays 0.95%. After 30 years the first has about $749,000 and the second about $580,000. The fee cost $169,000, nearly the entire original investment, without ever appearing on a statement.
Broad index funds from large providers typically charge 0.02% to 0.10%. Actively managed stock funds usually charge 0.50% to 1.00%. Some 401(k) plans, especially at small employers, carry funds above 1% plus plan administration fees on top.
Expense ratios are not the only cost. Financial advisors often charge about 1% of assets on top of fund fees, and some funds add sales loads or 12b-1 marketing fees. Add them up to see the total drag.
The common mistake is choosing a fund by past performance or name without looking at this line. It is on every fund's fact sheet, and it is one of the few things about an investment that is known in advance and fully under your control.