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  1. #1

    What Are the Fees Your Retirement Account Charges You?

    Iíve been intrigued by the lawsuit brought against a number of universities by their employees on the high cost if retirement account fees. I think this suit should be a warning to us all.

    After all, do you know how much you're paying for your retirement account?

    While the numbers may seem small, the truth is fees can shrink your savings faster than anything. Just a 1% difference in fees can significantly reduce the size of your savings over time.

    From what I understand, most retirement account fees can easily add up to 3-5% per year.

    As an example, someone who saves $5,000 per year for 35 years and earns an 8% annualized return after fees would end up with just over $861,000. Someone who earns a 7% annualized return after fees would have just $691,000 -- a 25% difference over a seemingly small 1% difference in fees.

    Why You Need to Look Into This

    In a recent online survey by Wakefield of small business owners, 45% expected their employees to pay up more than 1% in fees. A whopping 27% felt their employees should pay 4% or more annually.

    As you now know, 401(k) fees can easily erase the tax benefit of 401(k) investments for long-term investors. According to a study by Yale University and University of Virginia involving more than 3,000 401(k) plans with combined assets of over $120 billion, high fees cause investors to pay 86 basis points on average more than they would if they chose low-cost index funds.

    However, 401(k) providers are required by law to provide fee information for each investment option so you can choose a low-cost fund that matches the risk exposure you want.

    Even if your employer will not change the funds offered or the management company, there may be alternatives available in your plan that can help you save on fees. By opting for an account with fees under 1%, you can save hundreds of thousands more over the course of your life than a plan with fees of 3-4%.

    Administrative Fees

    About three-quarters of all 401(k) plan expenses fall into three categories: (1) administrative; (2) investment management; and (3) distribution.

    Administrative fees, sometimes called account maintenance fees, go toward legal advisers, trustees, bookkeepers and other professionals that keep the account running. Virtually all major retirement accounts, including Individual Retirement Accounts (IRAs) have some administrative fees, it pays to find out how much you are paying.

    If you have a plan outside of a 401(k), it's usually easy enough to find out what you are paying.

    With a 401(k), it can be virtually impossible to find out the administrative fees you pay, as this information does not need to be disclosed.

    The median fee for administrative services on 401(k) plans in 0.72% of total assets, or $346 per year for the average participant, according to the Investment Company Institute. Still, 10% of plans charge 1.72% or higher. Only 25% of employers foot this bill for company-sponsored plans; the rest are paid by employees.

    If you want to find out if your 401(k) has average or better administrative fees, you may try speaking with the human resources representative at your company or compare your 401(k) fees to competitors at

    Management Fees

    Sometimes known as investment advisory fees, these management fees are paid to the company that operates the mutual funds in which you invest.

    The fees will depend a great deal on how much management your investment type requires. An actively managed fund with live experts who choose stocks will have significantly higher management fees than a more passively managed index fund.

    While actively managed funds charge an average of 1.5% a year, index funds usually charge around 0.25% or less. This is a major difference and big reason many people prefer to invest in passively managed index funds.

    Unfortunately, not all employer-sponsored plans offer index funds.

    Distribution Fees

    Distribution fees (also known as service fees or 12b-1 fees) are designed to compensate brokers and advisers who advertise and sell mutual funds and they can easily eat up a large portion of your savings. Some mutual funds charge 12b-1 fees between 0.25% to 1% of your assets per year. Thankfully, there are many funds that do not have 12b-1 fees at all.

    You do not need to necessarily look for a mutual fund without distribution fees. However, it is a good idea to make sure you aren't paying an unreasonable amount. Also, you will want to confirm that "no-load" investments (or mutual funds in which you can buy and sell without a sales charge) don't incur extra 12b-1 fees. No-load funds do not charge loads but they can charge up to 0.25% in service fees.

    Aim for 1% or Less in Fees

    Reasonable fees depend on the type of investment you want. The best way to grow your savings is looking for an account that offers 1% or less in annual fees. Keep in mind index funds and passive investment options always have lower fees compared to active management accounts. If you choose exchange-traded or index funds, your annual fees can be as low as 0.20%.
    Current Fico Scores: 710 TU, 732 EQ
    My Goal for 2016: 750+

  2. What Are the Fees Your Retirement Account Charges You?
  3. #2
    Registered User Semi Pro Member
    Thanks for arming us with the ammo we need to pester HR to do the right thing!

  4. #3
    Registered User Senior Member
    I was pleasantly surprised that my new employer offered Vanguard funds. And that they had gotten admin fees as low as possible years ago. Just one small way it is a great place to work!

  5. #4
    Registered User Semi Pro Member
    Sometimes I feel like the deck is staked against the average working person.

  6. #5
    Registered User Junior Member
    It's a shame that employers and HR departments don't care as much about this stuff as they should.

    It would just be a lot simpler in some ways if I could have my own retirement account without the piddly $5,500 annual cap of IRAs.

  7. #6
    Okay, I'm looking into this tomorrow morning. Good to know what my funds are really costing me. And it may even be time to change up the funds I invest in. I think we have some low cost Fidelity funds available that i am not taking advantage of.

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