How do subaccount fees affect long-term performance?

How do subaccount fees affect long-term performance?

• A. Fees do not affect long-term results
• B. Expense ratios influence returns but not compounding
• C. Fees only affect taxes
• D. Higher expense ratios reduce net returns and compound over time, affecting final accumulation

Answer: (D)

Ongoing subaccount fees directly reduce the amount that can grow each year, and because investment returns compound, that yearly reduction accumulates to a much larger difference over time. Fees are taken out of the assets, so the base that earns future returns is smaller every year, meaning the growth in later years is built on a diminished principal. For example, with a starting $100,000 and a gross 6% return, a 2% expense ratio leaves about 4% net per year. After 30 years, that net path yields roughly $324,000, whereas no-fee growth would be about $574,000. The gap shows how higher expense ratios erode net returns and compound, reducing final accumulation.

Ongoing subaccount fees directly reduce the amount that can grow each year, and because investment returns compound, that yearly reduction accumulates to a much larger difference over time. Fees are taken out of the assets, so the base that earns future returns is smaller every year, meaning the growth in later years is built on a diminished principal. For example, with a starting $100,000 and a gross 6% return, a 2% expense ratio leaves about 4% net per year. After 30 years, that net path yields roughly $324,000, whereas no-fee growth would be about $574,000. The gap shows how higher expense ratios erode net returns and compound, reducing final accumulation.