According to Consumer Reports, a household with two median income earners will likely pay $155,000 in fees to service their 401(k). That's roughly three years of salary for an average worker and although it's reasonable to expect a person to be paid for their services, nobody wants to overpay. That might be what's happening in your investment accounts. How do you know if you're overpaying for your investments?

The truth is that it isn't easy to know. Since advisors don't print the costs of their service on a menu similar to a restaurant, sometimes you won't know until it's too late, but here are some common ways that expenses may be eating in to your gains.

SEE: 6 Problems With 401(k) Plans

Expense Ratio
If you own mutual funds, ETFs or closed-end funds in any of your accounts, you're paying for somebody (or a team of somebodies) to manage that investment vehicle. The job of that product is to make you money, but some cost you more than others. The expense ratio tells you what percentage of your investment is taken to administer the product.

Look for expense ratios that are as low as possible. Well below 1% is ideal, unless the product is significantly outpacing the market.

There are thousands of mutual funds on the market and although only a small percentage are offered to the investor in their 401(k), IRAs and regular brokerage accounts, you have access to most of these funds, along with many other investment products. Because of all the choices available to you, there's no reason to pay front-end or back-end load fees on your mutual funds. Look for no-load mutual funds or products outside of the mutual fund family to avoid these fees.

SEE: The Lowdown On No-Load Mutual Funds

Your Financial Advisor
Fee-only advisors are supposed to be more trustworthy than commission-based advisors, because they have less of a conflict of interest, but giving away 1.5% or 2% of your year's gains to your advisor is hard to swallow. This means that in order for you to break even relative to the rest of the market, your account has to earn the same rate of growth plus your advisor's fee. That may not seem so bad in years where the bull was running in the market, but when it has a particularly bad year, you still have to pay the fee.

Look for a fee only advisor that charges less than 1% of your total assets or somebody that charges by the service instead of an asset based fee.

SEE: Paying Your Investment Advisor - Fees Or Commissions?

Trading Costs
If you're a retail or part-time trader, you know that every time you trade a stock, bond, ETF, mutual fund or any other product, you have to pay a fee to buy and a fee to sell. On a $10,000 account, you could lose 1% of your gains in trading costs if you trade 142 times, assuming that a trade costs $7. That may seem like a lot of trading but over the course of a year, that's not a lot of activity for an active trader. Concentrate on more long-term holdings to keep trading costs lower, or open an account that allows for frequent trading at a flat annual or quarterly rate.

Mismanage your investments and expect to have a hefty tax bill. If you hold your investment for less than a year, you'll pay short-term capital gains tax of 35%. If you hold an investment for longer than one year, you'll pay 15%. If you withdraw money from your 401(k) prior to age 59 1/2, you'll pay taxes on the gains plus a 10% penalty. You can control your tax bill by holding investments for at least a year and seeking the help of a financial planner for how to properly get paid from your retirement account in the most tax-efficient way.

The Bottom Line
Investing is expensive - sometimes more expensive than necessary. You can't control what the markets will do in the future, but you do have a reasonable amount of control over how much you pay to invest. Paying too much can add up to a lot of money over time. Focus on what you can control instead of what you can't.

Related Articles
  1. Investing Basics

    Fee-Only Financial Advisors: What You Need To Know

    Are you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
  2. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  3. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  4. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  5. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  6. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  7. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  8. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  9. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  10. Retirement

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  1. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  2. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  3. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  4. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  5. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  6. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center