Are Fees Eating Up Your Retirement Savings?

Date: May 4, 2016

Are Fees Eating Up Your Retirement Savings?

Saving for retirement is a great first step in preparing for your golden years. While you probably check the returns in your retirement investment accounts periodically, you're likely not as keen on checking the fees. Though you usually won't write checks to pay for those retirement account fees, they will be paid out of your investment returns. Or, if the returns aren't sufficient, the fees may come out of the principal amounts you've invested in your retirement plan.

Types of Investment Fees

Sales charges, also called "loads" or "commissions," refer to the charges imposed by a broker to buy or sell various funds. "Front-end" loads refer to fees charged by the fund when you buy the investment, and "back-end" loads are fees charged by the fund when you sell it. For example, if a fund has a 1-percent front-end load, and you invest $10,000, the fee is $100, so you've actually only invested $9,900.

Brokers continue to charge investment or management fees for as long as you hold the funds, typically as a percentage of the account. For example, a mutual fund could charge a management fee of 0.6 percent of the account value per year. 

If you have purchased an annuity, you could also be paying insurance charges to the financial institution that backs the annuity. Annuities include insurance charges, such as mortality risk charges, when they provide a death-related benefit if you die before a certain age or before a certain amount of money is paid out to you.

Impact of Fees on Investments

Even seemingly insignificant differences in fee amounts can make a big difference long term. For example, over 35 years, a $25,000 retirement account will grow to $227,000 if the account returns 7 percent per year and charges 0.5 percent in fees per year.

But, if fees on the same investment are 1.5 percent, your balance after 35 years will be only $163,000. Even though the difference is only 1 percent per year, after 35 years, the larger fee makes a $64,000 difference in the amount of money you'll have for retirement.

Active vs. Passive Management

One of the biggest factors affecting how much you pay in fees is whether your fund is actively or passively managed. Passively managed funds track an established index, such as the Standard & Poor's 500, by matching its holdings to the exact stocks that make up the index. 

Actively managed funds attempt to provide higher-than-average returns by picking stocks, and generally charge a higher fee because of the extra research and higher trading activity required. However, neither active management nor large fees guarantee a higher return on investments.

Steps You Can Take

If you find that your retirement plan fees are too high, you have options. If you have an IRA, or a 401(k) from a former employer that you can roll into an IRA, consider moving your money to another fund or financial institution such as a bank, registered investment adviser or brokerage firm that charges more reasonable fees. 

If you have a current 401(k) retirement account, your options are more limited because you usually can't move your money. However, you can look for less expensive options within your employer's plan, or talk to your plan administrator about expanding your plan options to include those with lower fees.

References

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