Saving for retirement can be daunting.
It’s difficult to know how much you need to save to live a comfortable lifestyle in retirement.
Even if you know how much to save to reach your goals, actually saving the amount you need to set aside isn’t easy.
To make things even worse, investing for retirement isn’t free. No matter how you invest, you’ll almost always get charged a fee in one form or another.
These fees can take a big bite out of your retirement savings. This is even truer when you pay the fees on a recurring basis. They could eat up years of your retirements savings.
So, what are these fees that hurt your retirement savings and what can you do about them?
Here’s what you need to know.
1. Expense Ratios
If you’re investing in mutual funds or exchange-traded funds (ETFs), you need to be aware of expense ratios.
Expense ratios are a way of displaying the management fees you’ll pay to invest in a mutual fund or ETF. They cover that fund’s ongoing administrative costs.
Funds must pay many costs to operate. These costs can include compliance costs, marketing costs, management costs.
You won’t see a transaction to take money out of your account to pay an expense ratio. Rather, the returns you would have otherwise earned are reduced.
Expense ratios can put a big damper on your returns if you aren’t paying attention.
An expense ratio may not seem expensive when you consider your returns over one year. The difference expense ratios make when your returns compound over decades can be huge.
Here’s a chart to show you how a very small difference in a fund’s expense ratio could affect your future returns.
This example assumes your returns would be the same (8 percent) before the expense ratio. The only difference is the expense ratio that is charged. In each example below, a person invests $10,000 per year for the number of years listed in the chart.
Growth of Mutual Funds By Expense Ratio
|After 10 years...||$154,251||$152,080||$147,835|
|After 20 years...||$479,638||$465,523||$438,649|
|After 30 years...||$1,166,033||$1,111,539||$1,010,726|
|After 40 years...||$2,613,960||$2,442,997||$2,136,087|
2. Administrative Fees
Administrative fees can eat away at your retirement savings, as well. These fees tend to be a bigger deal when you’re first starting to save for retirement.
Administrative fees can be a flat dollar amount or a percentage of assets. Other fee structures could be used, too.
For instance, one 401(k) fee schedule shows the following fees:
- Annual participant fee of $45 per account.
- Pro rata administrative fees that may from time to time be deducted as a percentage of assets.
- Loan percentage fee that adds 3% to the interest rate of any 401(k) loans.
- Overnight check fee of $50 if you need an overnight check.
- QDRO fee of $300 if your account is divided as a result of a Qualified Domestic Relations Order (typically the result of divorce).
- Returned check fee of up to $50.
These fees are all in addition to the expense ratios that reduce your investment returns. The specific fees and costs for your retirement account will vary. Check your retirement plan’s fee schedule to see what you are charged.
If you’re looking to start an IRA, it makes sense to shop around to find the best company to house your IRA. One way you can shop around is by looking at their fee structures.
Some IRA custodians may charge you annual fees to keep your account open. Additionally, they may charge you a fee if you want to transfer your IRA to another company. While these fees aren’t huge, they’re still annoying and reduce your returns.
This is especially true if you’re getting started with investing and only have $5,000 invested to date. A $50 fee on a $5,000 portfolio is 1% while a $50 fee on a $500,000 portfolio is only 0.01%. That’s why it is super important to look at fees from the day you start investing.
Unfortunately, if you want to invest in your workplace retirement plan, you’re stuck paying whatever fees it charges.
If your workplace retirement plan has high fees, you can and should lobby for your employer to switch to a lower cost retirement plan.
In larger companies, you’ll want to talk to the human resources department about this. In smaller companies that don’t have a human resources department, you may have to ask around to find the appropriate person to speak to.
3. Advisory Fees
Many retirement accounts allow you to hire an advisor or a robo-advisor to manage your investments for you.
Having a professional or robo-advisor help you select your investments and guide your investing decisions could help you achieve higher returns.
Typically, advisors help investors the most when they’re able to talk them out of making bad investment decisions, such as panic selling when the markets are declining.
Advisors may charge a fee as a percentage of your assets. Robo-advisors typically charge lower fees than traditional advisors but offer less personalized service.
At the same time, traditional advisors usually charge a higher fee but offer more personalized service.
Not all advisors work on a percentage of assets fee model. Some may charge a flat hourly fee for advice while others may earn commissions when you buy and sell investments or other products.
4. Commission-Related Fees
You definitely want to watch out for commission fees. Commission fees vary from brokerage to brokerage, but you should be able to avoid or reduce these fees with a bit of planning.
The first commission fee to watch out for is the fee to make a trade on a particular investment such as a stock, mutual fund or ETF.
Many brokerages offer a list of investments, usually mutual funds, and ETFs, you can buy and sell with no commission fees.
These investments are often created by the brokerage themselves. They may also include a list of other investments from other firms.
For instance, Vanguard typically doesn’t charge their account holders fees to invest in Vanguard mutual funds except for a few funds that have higher transaction costs.
Vanguard even offers a list of over 3,000 non-Vanguard mutual funds that have no transaction fee if you trade online. You do have to pay an early redemption fee of $50 for all sales within 60 calendar days of the most recent purchase’s trade date for these funds.
Investments not on those lists may incur a fee per trade. If you hold less than $50,000 invested in Vanguard ETFs and mutual funds, they charge $20 per online trade.
Most brokerages charge you a per trade dollar amount for trading individual stocks. That said, there are some brokerages, such as Robinhood, that offer commission-free stock trading.
5. Load Fees
You’ll also want to watch out for load fees.
Load fees include front-end load fees, which you pay when you buy a load mutual fund, and back-end load fees, which you pay when you sell a mutual fund. These fees are often a percentage of your investment.
For instance, if you were to buy $10,000 of a front-end load fund with a 3% load fee, you’d pay a $300 load fee and only invest $9,700 up front.
If you were to sell a $10,000 investment with a 3% back-end load fee, you’d pay a $300 commission and only receive $9,700 after the sale.
Load fees are a way of paying a financial advisor for their advice. There are other ways you can pay for advice that don’t put your best interests in competition with the advisors best interests. You can usually buy similar funds with no load fees to keep more of the money, yourself.
Advisors can make even more money by suggesting you change investments from one load fund to another load fund.
If the advisor earns a back-end load fee for advising you to sell one investment then a front-end load fee when you to buy another investment, you can see how the advisors best interests and your best interests aren’t always aligned.
Brokerages May Waive or Lower Fees in Certain Cases
Brokerage firms are always looking to grow the assets held at their firms. As such, many brokerages reward people with large balances by reducing the fees they pay.
For example, Vanguard Brokerage Services charges a $20 account service fee. The fee is waived for clients who hold at least $10,000 in Vanguard funds and ETFs.
Similarly, investors with more assets to invest may receive lower expense ratios on their investments.
The Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) has a minimum investment of $3,000 and an expense ratio of 0.14%.
If you have $10,000 to invest, you could instead buy the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) which has a higher minimum investment of $10,000 but a lower expense ratio of 0.04%.
Fees Don’t Make a Fund Great - Look for Other Options
You may think a fund with higher fees should outperform funds that have lower fees.
Unfortunately, fees eat away your returns.
When examining what funds you want to invest in, be sure to take fees into account.
If there are two funds that are exactly the same but charge different fees, choosing the fund that has lower fees will allow you to keep more of your hard earned money.