I watched the funniest, scariest video last night on retirement plan account fees. It is a long video, but if you are even marginally interested in having enough money for retirement (which everyone should be) I highly recommend watching.
Retirement Plans: Last Week Tonight with John Oliver
There were a ton of take home points for me, but the one I’d like to discuss is FEES!
I’ve talked about banking fees and how to avoid them in the past. Banking fees can kill you, but they tend to be fairly small.
Unfortunately, the fees involved in retirement accounts are much, much more significant, particularly since most of them are percentage based.
Why Percentage Points based Fees Are So Important For Retirement Planning
Aaron and I each have Roth IRA accounts.
My account for 2016 was in a broker-managed account. Aaron’s account was in a self-directed account that I managed myself.
I was doing my end of year tax analysis and noticed something that I really didn’t like.
- My managed fund made 3.8% after fees (my fee for management was 1.25%). This means I made 5.05% on my money annually.
- Aaron’s funds, that I managed myself, got a 6.89% annualized return.
- Still not great, but better than the managed account (especially once fees are calculated).
I was not a happy camper when I saw these result, particularly since my account has almost double Aaron’s account. We made almost the exact same amount in interest income.
There is nothing worse than paying someone for horrible service.
I consider myself a fairly educated consumer and yet I still made the rookie mistake of not paying attention to the fees or really even monitoring my fund throughout the year.
Shame on me for not paying better attention.
The problem is that most fees are very cleverly disguised.
It is really hard to find the fees buried in all of the paperwork you receive and every company buries it slightly differently.
Here are some of the fees that you need to be reviewing within your IRA/401K plans:
- Plan administrative fees – Administrative fees typically charged by a 3rd party who is managing the plan. This is for record keeping, tax filing, trustee services and other management requirements.
- Other admin related fees may be called:
- Legal Fees
- Trustee Fees
- Transactional Fees
- Stewardship Fees
- Book Keeping Fees
- Finders Fees
- Individual Service Fee – Fee charged to an individual for extras. This includes 401k loans, extra investment decisions, and individual advice.
- Investment Fees – Investment management typically charged by a 3rd party entity that is managing the funds themselves.
- Keep in mind this isn’t the fees for the actual funds. This is the fee you are paying for someone to pick and choose the funds you have available for purchase.
- Fees on the funds are typically paid separately.
- These fees are often lumped under Broker Fees
- Many of the random fees are hidden under the 12b-1 Category which covers many of the marketing related fees.
- Other admin related fees may be called:
Depending on how your work 401K-retirement plan is written, your employer may pay most of these fees. However, more and more employees are finding ways to pass the fees on to their employees.
Please also note, that this list doesn’t include the fees charged by the mutual fund, ETF or other funds you’ve invested in. I’ll have to do a separate post on how to track those types of fees.
These fees can also come into play on private IRA accounts like mine.
It is critical that you do your research before opening your retirement accounts.
So on the surface, a 1-2% fee doesn’t seem like a huge deal. When you have small dollar amounts it isn’t as big of an issue. However, as your portfolio starts to grow, your little 1% fee starts to add up.
I created the infographic below to illustrate my point.
I choose to use small contribution amounts and small percentages based on a standard IRA contribution, but keep in mind these numbers will be more significant if you are contributing the max to a regular 401K plan.
Also, keep in mind that none of these numbers take into account tax implications.
If you are 40 years old and currently have $100,000 saved and are contributing $5,500 to our account annually, at 6% you should retire with around $731,000 dollars. However, if you have a 1% fee you lose $123,000 by retirement and at 2% you’ll lose $235,000 to fees.
If you are young the numbers are even more significant. If you begin saving at 25 and are contributing $5,500 to our account annually, at 6% you should retire with around $851,000 dollars. However, if you have a 1% fee you lose $187,000 by retirement and at 2% you’ll lose $329,000 to fees.
Please keep in mind that these numbers are based on annualized returns and don’t take into account typical market fluctuations.
I also want to note that fees paid to a brokerage firm aren’t always a bad thing. If my broker had gotten me a larger return than I would have gladly paid the fees and been happy with the delta.
It isn’t so much that the fees are always bad, as it is a reminder to choose your broker wisely and monitor their fees very closely.
Take the time to research your options when starting any investment plan
It takes a lot of time to meet with brokers, research stocks and manage your work 401K plan. I know that looking at the fees is the last thing on our list.
Please do yourself a simple favor – look at your 12/31/2016 balance and compare the balance to your 12/31/15 balance. Subtract out your contributions and see how much you’ve actually earned year over year.
This isn’t a perfect calculation, but it is a quick and easy way to see how you are doing.
If the numbers aren’t where you expect them to be it is time to make some changes.
Every fee and percentage point is money that won’t be there for your retirement.
Take the time to do a little bit of research now, your retirement self will thank you.
Since doing my end of year tax calculations I’ve moved my IRA to a self-managed account. I’ve had most of my investing on autopilot over the last few years as I’ve concentrated on paying off debt and other financial goals. Autopilot doesn’t work well with retirement funds.
It looks like I’ll be making some major adjustments to my portfolio’s in the next couple of months which means a lot of research. I’m probably one of the few people who gets excited about this type of stuff.
Watch for future posts on how I manage my investment portfolio, in the meantime, you may be interested in these posts:
- What is the Most Important Step in Retirement Planning?
- How to Get Started With your 401K Accounts
- What is your Retirement IQ?