Are Fees Depleting Your Retirement Savings?
Many investors are more concerned with how well their retirement investments are performing than they are about fees. This is especially true in rising financial markets, but investment fees take their toll and can have a significant impact on how much money you will have for retirement.
What Fees Can Do to Your Retirement Savings
Let's say you’re currently paying an average of 2% per year in fees on your retirement savings, and you now have an opportunity to cut that down to 1% per year. How much of a difference does that make?
Since retirement planning is a very long-term venture, let's look at the results over 30 years. Let's assume that you have $100,000 in retirement savings right now and your return on investment is 10% per year.
How do the numbers look with 2% in annual fees and 1% in annual fees, after 30 years?
2% annual fees. With a 10% return on investment, 2% in annual fees gives you a net return of 8% per year. After 30 years, your portfolio grows to $1,006,268.
1% annual fees. With a 10% return on investment, 1% in annual fees gives you a net return of 9% per year. After 30 years, your portfolio grows to $1,326,765.
That seemingly small difference of just 1% per year translates into $320,497 more in retirement savings over 30 years. That's why fees on retirement savings are so significant.
One of the problems with fees on retirement savings is that they have something of a stealth quality to them. It's never just one fee, but a culmination of several that add up to a higher percentage than you might realize. Knowing what they are is the best way to begin an action plan to reduce them.
So what are the specific fees that make can decrease the return on your retirement savings?
Typical Fees on Retirement Accounts
This is a sample of some of the standard fees associated with retirement accounts. Look very closely at any plan you have – there could be any number of fees buried in the details.
Annual fees. A typical brokerage fee is generally between $50 and $100 per year. It can add up if you have multiple retirement accounts. And they can be even more significant on low balance accounts. For example, a $50 annual fee assessed on a $5,000 IRA account represents one percent of the account balance. If there are other fees associated with the account, it could be a very expensive account to maintain.
Account management fees. Actively managed investment accounts have these fees, and there could be a wide spread between management companies. For example, robo advisors, such as Betterment or Wealthfront charge an annual management fee of 0.25 percent of your account balance. But a traditional investment advisor may charge you between 1% to 2% of your account balance.
401(k) fees. A plan administration fee is the most typical fee, and these fees can range considerably from one plan to another. A fee of 1% per year is hardly unusual.
12b-1 Fees. 12b-1 fees are part of the expense ratio typically associated with mutual funds. These are not charged by the retirement account administrator itself, but rather by the funds that make up your investment portfolio. It is essentially a marketing fee for advisors to promote a certain fund, and can range between 0.25 percent and one percent of the fund value each year.
Trading fees. These are commissions paid to an investment broker for the trades that you make within your account. They can vary from as little as $5 per trade to $10 or more per trade. If you're an active trader, these can be big expenses.
Load fees. These are fees that are charged by mutual funds. They run between 1% and 3%, and sometimes higher. They come in two flavors: front-end and back-end. A mutual fund may charge a 2% load to purchase a fund, and then another 2% load when it comes time to sell it. Exchange traded funds (ETFs) generally do not charge load fees.
What You Can Do to Lower Fees on Your Retirement Savings
There's a lot you can do here, and it can happen in several different ways. Since retirement investment fees come in so many different varieties, you'll have to make changes across the board.
Here are some suggestions:
Pay close attention to the fees your retirement plans are charging. Read the fine print, and know exactly what it costs you to have your money in any plan you participate in.
Consolidate your retirement accounts. If you have ten different IRA accounts, each charging $50 per year in annual fees, you'll be paying $500 per year for the privilege of having so many accounts. Cut it down to two or three, or even one account, if you can.
Move money from employer plans to IRAs as soon as possible. Not only are employer-sponsored plans more fee-intensive than self-directed IRA accounts, but the fees are often buried deeper in the plan so that you're not entirely aware of them.
If you're an active trader, go with brokers with very low trading fees. A brokerage firm that charges $7 per trade will be a much better deal than one that costs $10. If you make 100 trades per year, you'll save $300 with the lower cost broker.
Favor no-load mutual funds and ETFs. If you're a fund investor, your money should be invested in no-load mutual funds or ETF's. Even a 1% load can lower your investment performance significantly, particularly if it’s charged both on the buying and selling side.
The Bottom Line
Unlike 40 or 50 years ago, when most employees were covered by the defined benefit plans, you're now fully responsible for your retirement planning, including all of the fees that come with it. Do all that you can to keep those down to the absolute minimum because the difference can be a matter of several hundred thousand dollars. (Read more on the topic, here: Taxes on Retirement Assets: How to Pay Less.)