Fees are one of the biggest enemies of your retirement savings, especially when compounded over the course of your career. If you invest $100,000 in a portfolio and pay 1 percent annually in fees, it will cost you nearly $28,000 over 20 years, according to Securities and Exchange Commission calculations. If instead you had been able to invest that $28,000, your portfolio would have earned another $12,000. Here's how to minimize the cost of your retirement investments:
Choose lower-cost funds. In some cases, 401(k) fees are so high that they can cancel the tax benefit of investing in a 401(k) plan for long-term investors, according to a recent study by a pair of Yale University and University of Virginia professors. The study of 3,000 401(k) plans with more than $120 billion in assets found that high fees are leading investors to pay an average of 86 basis points more than they would if they invested in low-cost index funds. But the researchers also found that many investors could avoid these excess fees by making smarter investment selections. "A lot of the fees that people are paying in these plans are fees that if they allocated their portfolio differently, they wouldn't incur," says Quinn Curtis, an associate law professor at the University of Virginia School of Law. "In a lot of cases, they could get very similar risk exposure at a lower cost." The Labor Department now requires 401(k) fee information about each investment option to be provided to individual 401(k) participants.
Aim to pay less than 1 percent in fees. A reasonable investment expense varies depending on the type of investment. But, in general, it's a good idea to try to keep your investment costs below 1 percent annually. "You want to be under 1 percent as your goal. I would even want to be lower," says Wayne Zussman, a certified financial planner and president of Triton Wealth Management in Maryland. "If you go with index funds or [exchange-traded funds], you can be as low as 20 basis points. Passive investments and index funds have lower fees than active management."
However, a recent Wakefield Research online survey of 500 small business owners commissioned by ShareBuilder found that 45 percent expect employees to shoulder more than 1 percent in fees and over a quarter (27 percent) said paying 4 percent or more in annual costs was fair. "It's odd to us that 3 percent or more was popping up from a lot of folks as decent," says Stuart Robertson, president of ShareBuilder Advisors. "We advocate for employees that it stay under 1 percent. It can mean hundreds of thousands of dollars of difference for someone who is saving in a plan."
Find out how administrative costs are charged. Some employers directly pay the administrative costs associated with the 401(k) plan on behalf of employees, but others subtract the fees from the assets in employee accounts or recoup the costs from fees associated with individual investments. Some employers also pay extra for access to investment advisors and online guidance or to consultants to help design and adjust the plan, and these costs may also be passed along to individual participants.
Ask for better options. If your 401(k) plan doesn't have investments with reasonable costs, it's worth politely inviting your employer to consider better options, especially if you can present reasonable alternatives. The ShareBuilder survey found that many small business owners are fielding requests to switch 401(k) providers (32 percent), select lower-cost investments for the plan (30 percent) and lower administrative and asset management fees (29 percent). "If you are in the unfortunate plan that doesn't have any low-cost options no matter how you allocate the portfolio, then all you can really do is encourage your employer to change the plan to add some low-cost options," Quinn says.
Negotiate. Some investment fees are negotiable, especially if you maintain a large balance at a single institution. "If you consolidate all your IRAs to one tax-deferred and one Roth, you are going to reduce your annual fees," Zussman says. "You need to be proactive and make a phone call and say, 'How can I reduce the fees?'" Some financial institutions will reduce or waive fees and offer lower-cost investments to people who maintain specific account balances or abide by other rules.
[See: What Everyone Should Know About IRAs .]
It's worth putting in the time to find or negotiate lower-cost investment options because lower fees will significantly improve your investment account balance upon retirement. "Fee numbers that can seem small can add up to a substantial amount when they are compounded over your career," Quinn says. "Just try to avoid the funds that charge particularly high fees. Performance doesn't always persist, but fees usually do."
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