---
title: Is Your 401(k) Costing You? Warren Buffett Beat Five Hedge Funds With a Plain Index Fund
description: Warren Buffett made a bet that a S&P 500 index fund could beat five hedge funds. He was right, and investors can borrow from his approach.
authors:
  - name: Marc Guberti
    url: https://money.com/author/marc-guberti/
    bio: Marc Guberti is a personal finance writer who hosts Breakthrough Success, a podcast where he teaches listeners how to grow their businesses and achieve personal transformations.
    at_money_since: 2024
    articles: 475
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published: '2026-11-13T16:45:27.000Z'
section: Retirement
word_count: 506
canonical: https://money.com/401k-fees-warren-buffett-index-fund/
type: Article
source: structured-blocks
---

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![Warren Buffett And BofA CEO Brian Moynihan Speak At Georgetown University](https://img.money.com/2026/11/Explainer-Warren-Buffett-Index_ee48e2.jpg)

Back in 2008, Warren Buffett made a famous bet that the S&P 500 would beat hedge funds over the next decade. He won.

The S&P 500 index fund he chose was up by 125.8% over that stretch, while the best of the hedge funds he was comparing his performance to only had an 87.7% return. This wager illustrates how an easy strategy of buying index funds can produce compelling returns, and it can be a powerful lesson for people saving for retirement.

## Buffett’s S&P 500 bet

Buffett’s 2017 shareholder letter discussed the result of the bet he made with hedge fund managers. While the S&P 500 delivered an average annual gain of 8.5%, the five hedge funds picked by Protégé Partners had between 0.3% and 6.5% average annual gains.

Not every investors wants to — or has the time to — research and analyze stocks. But even if they do, the experiment shows how even the experts can underperform the benchmarks like the S&P 500 and Nasdaq Composite.

## How compound interest works

Compound interest is the interest that you earn on not just your principal, but also on the investment gains that have grown over time. It’s what makes investing for the long term so powerful.

Let’s assess how compounding works in your favor. Here’s how a $100,000 initial investment would grow over 30 years, assuming a 7% annualized return:

-   Year 1: $107,000
-   Year 5: $140,255
-   Year 10: $196,715
-   Year 15: $275,903
-   Year 20: $386,968
-   Year 30: $761,226

## How fees impact your balance

Fees can silently erode a balance over time, especially if you have a high 1% fee. Firms like Vanguard and Fidelity Investments make fees more manageable, with some of the top funds having expense ratios below 0.1%.

It’s important to analyze fund fees before committing to a mutual fund or an exchange-traded fund (ETF). Each fund lists an expense ratio, which is the total fee you pay and is based on a percentage of your fund’s value. Since it’s a percentage, the fee changes based on the size of your portfolio. If two investors put money into the same fund, the investor who put more money into the fund will pay more in fees.

A 1% fee on a $100,000 balance is $1,000. But a 0.1% on the same balance is just $100.

## What to do about high fees

If you find you're paying high fees, you may want to exit the fund and invest in a mutual fund or ETF with much lower fees. Buffett wrote in his 2017 letter that “fees never falter” — as in, funds will continue to collect fees even if returns are poor.

Investors should pick the funds that can deliver the best returns given their preferred risk tolerance. A fund with a high fee puts you at a disadvantage right out of the gate, and you can easily find funds with expense ratios below 0.10%.

You can get a lower expense ratio if you focus on [index funds](https://money.com/index-funds/), which, as Buffett proved, can offer generous returns.

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