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How Much Could You Be Throwing Away in Investing Fees?

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Nest egg savingsWhen it comes to retirement investing, there is no way to avoid the fees. You will have to pay something at some point. However, just because you can’t avoid fees entirely doesn’t mean that you have to pay high fees throughout your life.

One of the best things you can do for your financial future is to reduce fees associated with your retirement account. Why? Because you might be surprised at how much you are throwing away in unnecessary fees. We’re talking more than $100,000 in some cases. What could you do with that money instead?

Where are You Losing Money to Fees?

“It’s what we don’t know that hurts us most,” says Donald B. Cummings, managing partner at Blue Haven Capital LLC. “As egregious and unnecessary as yearly account fees are, it isn’t the annual — and transparent — fee that kills the returns in a retiree’s account. It is usually the hidden fees of the funds from which the retiree chooses, or which the commission broker chooses for the retiree.”

He points out that there is big a difference between the S&P 500 fund that charges 1.50% annually, and the S&P 500 ETF that charges 0.10% annually. “In either case, the investor might never see the fees,” Cummings says. But the difference 1% in annual fees can make is huge once you start adding up the impact on a larger nest egg. “It may not sound like a big deal to a newly married couple wondering what to do with their $5,000 IRA,” Cummings says, “but to a retiree with $600,000, that fee means $35,000 in just five years. That could be a new car, part of a college education, or even a nice vacation with kids and grandkids.”

Mindy Crary, MBA, CFP, and Financial Planning Coach breaks down some even scarier math. “Let’s say someone had a retirement  account worth $250,000. Let’s make things simple, and say it’s an old 401k that they rolled into an IRA and invested,” she suggests. “If we assume that on average, it made 6% annually, in 30 years it would be worth $1,435,873. Nice, right?”

Not so fast. Crary says that some financial advisers charge what is called a “wrap” fee. If your fund is actively managed for 1.25% annually, and all things are the same, 30 years later you’ll have $1,110,243, or $126,775 less, according to Crary. And that’s not the worst part. The total is closer to $198,884 lost because that money you paid in fees wasn’t allowed to earn compound interest. That’s almost $200,000! Because of fees!

What Can You Do?

Cummings recommends that if you hire an adviser to help you, you should choose one that works on your behalf, fee-only, rather than paid on commission from higher fund fees.

But what if you are stuck with a 401(k) from your employer? Well, if it’s that bad, and you aren’t getting an employer match, you can roll it into an IRA that allows you to choose your own lower-cost investments.

Jonathan Leidy, a CFA and CFP with Portico Wealth Advisors, says that you should look at the cost of the plan. “If your total plan cost is over 1.5% a year for a smaller organization and over 0.9% for a mid-sized organization, you are likely paying too much.”

You can learn more about your plan costs from the new 401(k) statements that are required of plan managers. Leidy says that one of the biggest red flags is the 12b-1 or “revenue sharing” fees. If you aren’t happy with your plan, talk to human resources about the options, and what can be done. It might even be possible to get involved on a retirement plan committee with the firm. “Consider getting involved by asking to be included,” Leidy says. That way, you have some influence over the process.

(Photo: RambergMediaImages)

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8 Responses to “How Much Could You Be Throwing Away in Investing Fees?”

  1. admiral58 says:

    unless you work for a large organization, roll it into a ira at fidelity or something, and load up on ETFs, perhaps with the free trades, and keep it invested

  2. Fees are a nest egg killer. I’ve calculated that just a 2% annual fee slashes a 6% investment return on $10,000 by 42% over 10 years. Someone’s getting rich from managed investing, and mostly it’s not the so-called retail investor.

  3. It would be one thing if the fees somehow guaranteed a better return… but they cannot, nor will they ever. I’ll stick with index funds.

    • Scott says:

      On paper, index funds are better. In real life, active management of funds is always required for properly correlate your risk tolerance to your own life situation – question is can you do it yourself or would you rather pay someone else to do it?

      • JoeTaxpayer says:

        Scott – don’t confuse asset allocation with managed funds. The former is designed to target your stock/bond mix, usually based on age. The latter, to offer the hope that one can choose a mix of stocks to beat the average.
        To Kurt’s point – a lifetime of once a year allocation shift, i.e. just selling from the part of the mix that grew beyond its target percentage, is going to beat that lifetime of even 1%/yr extra expense.

  4. Scott says:

    This seems to focus only on fund fees, not portfolio fees. I pay a fee through my 401k to have it actively managed. They help rebalance it without me having to worry about it. When I was 25 and single I had time to manage this stuff myself, but ten years later, married with two kids, the small fee I pay is worth it to me.

  5. Anonymous says:

    Proper concept but the numbers quoted in the article are inaccurate.

    In your example the account grew to $1,435,873 over 30 years. Then state a value after fees of $1,110,243, or $126,775 less.

    Simple math says it would be $325,630 less due to fees.

    If that is accurate then the “nearly $200,000″ opportunity cost, due to the loss of compounding on that money, is also understated.

  6. Jim says:

    Too many people here think that everyone can manage their own investments themselves to save on fees. Not everyone is capable of managing their own portfolio, and it has nothing to do with intelligence or educational level. Fees are a necessity, but some brokers do offer a free portfolio analysis and even a free annual review.


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