Reduce Investment Fees

401(k), Budgeting, Investing & Retiring, IRA, Retirement


Do you know how much you pay in fees for the handling and management of your investments? If not, how do you know you are getting the best value for your money?

Fees cut into retirement savings more than most people realize, because they are essentially compounded along with your earnings. The Securities and Exchange Commission (SEC) calculates that 1% annual fees for a $100,000 starting portfolio will cost you $28,000 over twenty years of investing. You could have used that $28,000 to gain another $12,000 had it been reinvested.

Keep the following tips in mind as you review your investments, and see how you can maximize your fund balances.

  • Look Out for Loads – “Loads” are commissions that mutual funds charge to cover part of their management expenses. Loads may be charged upfront (front-end) or upon the sale of the fund (back-end). Look for “no-load” mutual funds that do not generally charge fees as long as you hold the funds for a minimum time period — not an issue for a long-term investor.
  • Trade Only When You Have To – Are you trying to time the market to maximize your earnings? If so, stop trying. You stand a very good chance of being outmaneuvered by investors with greater acumen and resources, and each transaction you make has associated fees that further decrease your funds. The same principle applies to panic buying or selling. Lay out a balanced plan that meets your risk needs, and stick to it.
  • Consider Passive Investments – Actively managed funds tend to have higher management fees since they require more maintenance. See if passive funds are available that have a similar historical performance and risk profile compared to the active equivalent. If you choose to go with the active fund, investigate the performance in-depth and make sure that the expected returns are worth the extra fees.

  • Look Over Fee Details – Start by looking at the expense ratio, which is the fund’s operating expenses divided by the assets being managed. A fund’s prospectus should break down the elements of the operating expenses that have associated fees, such as marketing, recordkeeping, and legal expenses. The largest component will be the fees paid to the investment manager, especially for an active fund.

    Are any of the fees disproportionate to competitive funds? Is the expense ratio unusually high? Are there annual fees or fees associated with minimum account levels? Compare these fees between your investment choices.

  • Review Workplace Options – The 401(k) sponsored by your workplace may have limited options, yet with some research, you can probably find the best option with respect to fees vs. performance. See if your research turns up better fund options that your workplace can consider. Smaller companies do not often have resources to optimize 401(k) options and your input may be welcome.
  • Negotiate – You can’t get a deal if you never ask for one. You may be able to negotiate a better deal if you find fees that are unusually large within a fund, or if you can gain leverage by combining multiple accounts or maintaining a specific balance level. Enter the negotiation with background research so you can back up your request.

There is nothing inherently wrong with paying fees for your investment management, as long as you are receiving relative value for your money. Look over your portfolio and compare it with similar funds at similar levels of risk. If you find your investments to be lacking, you may not want to switch straightaway, but at the very least, your investment group has some explaining to do. Make them earn their fees, or find a better option.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

Photo ©iStockphoto.com/PatCotilloJr



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