​When people think about threats to their retirement savings, the tax man is the usual culprit. But when you look closely at where the missing cash is actually going, a new villain emerges: fees.

Fees are guilty of looting your retirement savings, and they’re probably eating even more of your nest egg than you realize. Read on for the most common fees and how to avoid them. (For related reading, see: Are Fees Depleting Your Retirement Savings?)

Why to Fear Fees

If you aren’t sure why you should care about fees, here’s an example. Bankrate.com calculated that someone who saved $5,000 a year — the current limit for IRA contributions — for 35 years and earned 8% return net of fees would have 25% more than someone who earned 7% after fees. Every percentage you save in fees will go back into your pocket.

But one of the most extraordinary things about fees is that they often signify a lower-performing fund. A Morningstar study recently found that actively-managed funds underperform passive funds. That means not only are you paying extra money in fees, but you’re paying more for a fund that’s performing worse. Talk about a double whammy.

Here is a list of the most common fees you’ll see:

  • Administrative fees: These are often found in group retirement plans. Administrative fees are charged to pay for the record-keeping involved in administering a group plan fund.

  • Management fees: A management fee is charged to pay for the managers responsible for the funds.

  • Distribution fees: These are also referred to as marketing or 12b-1 fees. These are used to pay for marketing the funds. Out of all the fees, these are often the most controversial because their rates can range from 0.25% to 1%. (For related reading, see: Retirement Savings: How Much is Enough?)

  • Early withdrawal fees: If you’re saving for retirement in an IRA or 401(k) plan, you have to be aware of the fees you’ll owe if you withdraw those funds early. For IRAs, you have to wait until age 59½. For 401(k) plans, you can withdraw funds at age 55. However, you also can’t wait indefinitely to access those funds. If you have a traditional IRA or 401(k), you have to take out the required minimum distribution before age 70½ or you’ll face other fees.

  • Surrender fees: These are fees you have to pay if you cancel or withdraw funds early from an insurance contract or annuity.

  • Transaction costs: If you’re managing individual stocks or other securities, you’ll have to pay transaction fees when you buy or sell a product. These fees can eat away at any potential profits you might earn.

How to Mitigate Fees

Before you choose a fund to invest in, look at its fees — one of the top considerations you should have when deciding where to invest. When looking at the funds you have, consider both their average return and their fees. Both will be necessary to determine which is right for you.

If you want an easy way to avoid paying fees, choose funds that are passively managed. These include exchange-traded funds and index funds. ETFs are funds that follow a certain index, commodity, bond, or index fund. An index fund is designed to mimic an index such as the Standard & Poor’s 500 Index. You can find ETFs or index funds that perform well and will not charge you superfluous fees.

The Bottom Line

You may not be able to avoid all fees, but you can at least know what you’re being charged for. Learning a bit about your own fees may encourage you to take active steps to address them. You can also talk to a Certified Financial Planner who can advise you on other ways to reduce such fees. (For related reading, see: How to Save More for Your Retirement.)

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