If you hope to retire one day, and you’re not one of the lucky few with an old-school pension, saving and investing regularly isn’t an option – it’s required. And how you invest can make as big a difference in the end as what you invest in.
Numerous studies have shown how high and occasionally predatory investment fees chip away at our earnings year after year, often unnoticed. A study from the Center for American Progress even showed that, over the course of a 40-year career, investment fees of just 1% could erase as much as $70,000 from an average worker’s account.
One big issue with retirement accounts and their fees is that the average saver doesn’t even know what to look for, says financial advisor Tom Diem of Diem Wealth Management.
“Most people look at their options in a retirement plan, look at the recent performance of the funds to make their choice, and go back to planning their vacations,” says Diem. “[But] costs do matter in the long run.”
As Diem notes, some think they’ve done their due diligence just by glancing at the total fund expenses listed. However, those stated fund expenses are just the beginning. Unfortunately, many costs, like those associated with trading or plan administration, are undisclosed or buried in fine print, says Diem.
If you’re not sure what to look for – or which questions to ask – you may not even realize what you’re paying.
Retirement Fees That Quietly Drain Your Account
If you’re in the process of selecting a retirement plan or simply rethinking where you stash your investment funds, it helps to know which fees are out there. Because, like it or not, the fees you’re paying can make a huge difference in the amount of money you end up with when you’re ready to retire. Here are a handful of retirement plan fees that could be silently and slowly draining your account over time:
#1: Plan Administration Fees
Many 401(k) plans charge an administration fee that takes care of the daily record-keeping and services that keep the plan alive. This fee can be used to cover an array of services you may not be aware you’re paying for – things like accounting, legal, trustee, and office administration.
While some employers cover the administration fee for their worker’s 401(k) plans, many employees pay this fee out of their earnings each year. While plan administration fees aren’t substantial (could be in the $50 range each year), they can still do damage on smaller accounts or when you’re first starting out: If you’ve got a modest $1,000 in your account, and it grows 5% over the course of a year, just a $50 fee can wipe out the entire year’s investment gains.
The bottom line: Be aware of administration fees you’re paying on retirement accounts or individual funds. While they may seem insignificant, they can chip away at your average return – especially since they’re charged every year.
#2: Investment Advisory Fees
If your retirement plan is being actively managed, you may be paying an investment advisory fee that is typically charged as a percentage of your total 401(k) balance each year. If you have $100,000 saved for retirement in a 401(k) plan, for example, and your investment advisory fee is 1% annually, you would fork over $1,000 per year for the privilege of these services.
Keep in mind that investment advisory fees are charged whether your plan earned money or took a big hit. During an up year, you may not mind paying a fee in exchange for exceptional earnings. But, during a down year, an additional 1% fee can be especially painful.
#3: Internal Expense Ratios
Joseph A. Azzopardi, a financial planner and author of The Well-Planned Retirement, says the most common fee he sees clients gloss over is the internal expense ratio of mutual funds. Whether held within a employer-sponsored retirement plan like a 401(k), or within a professionally managed investment portfolio, these fees often go overlooked and can be an enormous drag on long-term growth, he says.
The good news is, expense ratios are falling as more consumers have caught on to the ongoing costs of these fees, according to a 2015 fee study by Morningstar. But they still eat into your savings: The average “asset-weighted expense ratio across all funds… was 0.64% in 2014, down from 0.65% in 2013 and 0.76% five years ago,” according to the study.
Remember, these fees are charged in addition to every other fee your retirement account commands. So, make sure to add them all up.
#4: Load Fees
While you may be completely unaware of ongoing fees charged to maintain your retirement accounts, you may also be blind to load fees – or sales charges you’re paying when you purchase mutual funds. Some mutual funds charge load fees on the front end of the purchase, while a back-end load is a deferred charge that arises when you sell the fund.
If you’re not careful, load fees can absolutely eat away at your ongoing investment returns right from the start. According to American Funds, front-loaded fees generally cost between 3% and 6% of your investment, or sometimes a flat fee. Back-end loads, on the other hand, start at around 5% of each sale but decline the longer you hold onto the investment.
#5: Bid-Ask Spread
The bid-ask spread might be the sneakiest fee of them all, according to San Diego financial advisor Taylor Schulte. If you trade individual stocks or exchange-traded funds (ETFs), you’re paying this fee. Even if your brokerage firm lures you in with so-called “free trades,” you are still paying this fee, notes Schulte.
“Put simply, the bid is the amount a buyer is willing to pay for a security, and the ask is the is the amount a seller is willing to let go of it for. The bid and the ask price are never the same,” he says. “The difference between these two numbers is the spread, which is the amount of money your custodian or brokerage firm makes for facilitating the transaction. The fee can be as low as 0.01% or as high as 20% or more.” Securities without a lot of trading volume — small stocks or niche ETFs – can often carry large bid-ask spreads.
According to Schulte, you can avoid this fee by purchasing index funds instead of individual stocks or ETFs. “If you insist on trading stocks or ETFs, you could simply become more aware of the bid-ask spread,” says Schulte. “Along with avoiding securities with high spreads, you can also consider using marketable limit orders instead of market orders when making a trade. This sets a boundary around the price you are willing to buy or sell a security for.”
#6: Variable Annuity Fees
Variable annuities are very easily misunderstood, and that’s especially true when it comes to their hidden fees. Unfortunately, there’s more than one fee to be aware of if you’re including this investment option in your portfolio.
“The most commonly overlooked fee is a fee for an income rider on a variable annuity or a fixed-index annuity,” says financial planner Chris Hammond of Retirement Planning Made Easy. “Often times, these fees can exceed 1% of your account balance on an annual basis. And if you don’t need the additional guaranteed income, then what’s the point in paying for the guarantee?”
“Many investors also fail to realize that variable annuities have an M&E [mortality, expense, and administration] fee,” says financial planner Benjamin Brandt of Retirement Starts Today Radio. “The industry average for this fee is 1.25%!” says Brandt. “This is a massive, often unneeded fee that is killing your retirement.”
Whether you’re investing for retirement on your own or participating in an employer-sponsored 401(k) plan, it’s possible you’re forking over commissions depending on how you invest. Commissions are sales charges paid to an investment broker or a brokerage firm. Any time you purchase or sell stocks, options, futures, and certain types of mutual funds, you are likely paying a flat fee for each trade.
While you can whittle your fees down to around $3.95 per trade with a low-cost online brokerage firm, or next to nothing if you set up automatic contributions to a mutual fund, you could be paying $9.95 or more per trade if you’re not careful — both when you buy the stock and again when you sell it. It’s easy to see how these fees add up and eat into any investment gains: If you make a $500 trade with a $9.95 commission fee on each end, you’d need the investment to increase 4% just to break even.
The Bottom Line
These are just some of the hungry fees that could be eating away at your retirement savings year after year. Depending on the type of accounts you have, who manages them, and how they’re set up, there could be an array of other fees inflicting retirement death by a thousand cuts.
If you’re interested in seeing where your fees are at compared to the benchmark, you can get a quick analysis for free by signing up for a free account with Personal Capital and using their fee analyzer tool. And if you’re still worried about the fees you’re paying on your retirement funds, speaking with a fee-only financial planner can help you figure out some ways to save.
Like with most things, however, the sooner you dig into your situation, the better off you’ll be. Because when you’re paying huge fees on your retirement funds, time is of the essence.
“When you lower the costs of your investments, the better the return will be and the more money you are likely to make,” says financial planner David G. Niggel of Key Wealth Partners in Lancaster, Pa. “Over time, this can add up to a substantial sum of money.”
Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.
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Do you know how much you’re paying in retirement fees? How will you find out?