Costly fees you may not know you’re paying
“Amount due for fees” isn’t a line item most investors will find in their statements. Instead, fees are typically expressed as a percentage of the assets in an account and then skimmed off the top of annual returns or baked into an investment’s share price.
The lack of clarity might explain why 46 percent of full-time employed baby boomers polled by investment advisory firm Rebalance IRA in 2014 said they believed they paid no fees in their retirement accounts.
If only that were true. Based on average contribution rates, 401(k) fees and plan costs, a median-income couple, both of whom work, would pay nearly $155,000 in investment fees over 40 years, according to public policy organization Demos. That’s almost one-third of their total retirement savings returns.
Fees charged by mutual funds within 401(k) plans are on the decline, but all-in costs — including plan administrative fees — often depend on factors including plan size, total assets, service levels and fee structure that are largely outside of an individual consumer’s control.
If you know what you’re looking for, it’s a easier to find the fees buried in 401(k) plan summaries, obscured by jargon in mutual fund prospectuses. Here’s where to point your headlamp:
■ BROKERAGE COSTS: The broker with the lowest commissions might not be the best deal. Investors who trade infrequently should look out for annual inactivity fees and maintenance costs (which can range from $50 to $200 combined). There are also transfer or liquidation fees ($50 to $75 for a full or partial transfer) and fees to access data feeds and trading tools, which can range from $5 to $50 or more per month for real-time quotes to hundreds of dollars for premium reports.
■ 401(k) ADMINISTRATIVE FEES: Some employers match a portion of each employee’s retirement plan contributions, and the most generous also kick in for the costs of record keeping, compliance and investment curation. See the plan’s “summary plan description” or email HR to find out if you or your company pays the administrative fees.
■ MUTUAL FUND MANAGEMENT FEES: Want a new way to say “fee”? Crack open a mutual fund prospectus where sales commissions, management and administrative costs are referred to by names such as “loads” and “12b-1 fees.” The double blow of the “expense ratio” is the most costly of all: First, as the account balance increases, so does the amount skimmed off the top to cover fees.
At the high end are managed mutual funds helmed by investment managers, which carry an average expense ratio of 1.31 percent, according to trade association Investment Company Institute. Index mutual funds, which have an average expense ratio of 0.71 percent, are a lower fee alternative. They’re automated to match the return of a particular market index. In the middle are target-date mutual funds, with an average expense ratio of 0.94 percent.
It’s even better to compare a fund’s expenses and returns with those of its peers via sites such as Morningstar.com, FeeX.com and FINRA.org.