In order to be ready for your retirement, saving and investing is a must. How you invest is just as important as what you are investing your hard earned money in. When it comes to investing, most people are paying attention to available options and their performance. They are not thinking about those pesky hidden fees that can chip away at your earnings for years without you even knowing it. Even if you are doing your homework and checking the fund expenses, you may not see all the fees. Many are buried in fine print or undisclosed.
Below is a list of some of the fees to look out for before you put your money into an investment.
Many 401(k) plans charge what is referred to as an administration fee that covers different services like legal, accounting, office administration and more. Some employers will cover this for their employees, but many are paying this fee out of their 401k earnings each year. Some of these fees may not be too much but if you have an account with a small amount in it, $50 dollars can do away with the entire year's gains. Just beware and make sure to look into these fees as they can really rack up since they are charged on a yearly basis.
If your 401k is being managed for you, you are paying what is called an investment advisory fee. This fee is usually a percentage that is taken off your total 401k balance each year. So if you have $100k in your account and your fee is 1% of that, you are dishing out $1k dollars every year. And this fee is charged whether you earned money or not. If you are having a great year, it may not matter. But if you have a down year, that can make a dent.
Whether you have your own investment plan or one with your employer, one fee that many people overlook is the internal expense ratio when it comes to mutual funds. These fees can really bring down your numbers but the good thing is they have been going down over the past number of years.
Load fees are another fee to be aware of. These are charged whenever you purchase a mutual fund. They either charge you when you first purchase the fund (usually between 3%-6%)or upon selling the fund ( 5% or more). If the fund charges a back-end load fee, the longer you keep the fund, the percentage starts to go down. These fees are especially important to be aware as they can really chip away at you returns right from the beginning.
This particular fee just may be the trickiest one of them all. If you are trading exchange traded funds (ETFs) or individual stocks, you are being charged this fee. This bid-ask spread is still being charged even if you are being told it is a free trade. So beware!
To make it simple, the bid part of this fee is the amount a buyer will pay for a security, and the ask is the amount the seller is willing to sell for. As with any negotiation, the two numbers are never the same. The difference between these numbers is what they call the spread, and it is the commission your firm makes for aiding the transaction. The fee can really range from low to upwards of 20%. In an effort to avoid this fee, you can purchase index funds instead.
If variable annuities are part of your portfolio, beware. They too have hidden fees. They have what is called an income rider fee on a variable annuity or a fixed-index annuity. These fees are yearly and are typically above 1% of your account balance. Variable annuities also carry another fee called a M&E (mortality, expense, and administration) fee, this fee can be upwards of 1.25%. Needless to say this is killing your retirement account.
Commissions are tacked on to most investments and you can be paying more than $10 per trade if you are not careful. Whether you have your own investment plan or an employer sponsored 401k, you are most likely paying these out depending on how you are investing your money. This flat fee is the sales charge that is paid to the broker when you buy and upon selling. In order to lower the fee, you can try and go with an online brokerage firm or go with auto contributions to a mutual fund.
As you work hard to put away savings for retirement, these are just some of the pesky fees that may be chipping away at your balance. Take stock in who is managing your accounts, the types of accounts you have and how you have them set up. It also can't hurt to meet with a fee-only financial planner that can help you figure out how you can save and invest better. Time is of the essence with a retirement account and you want to keep as much of your hard earned money in it as possible.