An ideal retirement requires a lifetime of saving, smart investing, and consulting with people who charge based on your assets. But when planning and saving for retirement, you might also face hidden fees — fees to trade, fees to advise, and even fees to market their own insurance products. Some of these fees are avoidable, but many are not.
To get an adequate idea of exactly how much you might be paying in fees and charges, read up on these seven hidden fees that come with creating a retirement fund.
1. Advisory fees
While financial advisors need to eat and pay rent just like anyone else, the rhetoric they use to express how much you’re being charged might be a little too inconspicuous. Advisors often talk in “basis points,” which simply means “tiny fractions of a percent.” So for example, 1% comprises 100 basis points, and 50 basis point fee equals 0.50%.
An advisory fee of 1% of assets is typical, but you need to understand what 1% will cost you. Let’s say your portfolio is valued at $500,000. If you’re being charged a 1% advisory fee, you’ll have to pay $5,000 annually.
2. 401k expense ratios
401k plans are offered at most mid-to-large-sized companies, but many of the people who contribute to them don’t realize that these retirement savings plans aren’t free. Depending on the funds you pick, you could be stuck with high expense ratios that will slowly chip away at your hard-earned retirement savings. And, these expense ratios might not be explicitly expressed to you. Instead, they might be buried in 60 pages of fine print.
Your expense ratio might be somewhere between 0.5% and 2%, which doesn’t seem like much. But just as compound interest magically accumulates at an exponential rate over a significant period of time, so does a 2% expense ratio that works just as hard against you. So when picking funds for your 401k, try to pick funds with low expense ratios.
3. 12b-1 fees
12b-1 fees are annual marketing or distribution fees on some mutual funds. These fees are typically included in a fund’s expense ratio. Initially, 12b-1 fees were introduced to help investors by marketing a mutual fund to yield higher assets and lowered expenses. However, some argue 12b-1 fees can bring down your returns instead of improving your fund’s performance.
This past September, the Security and Exchange Commissions (SEC) filed proceedings against First Eagle Investment Management, an asset management company that allegedly improperly used investors’ mutual fund assets for payments to cover “marketing and distribution of fund shares.” According to the Wall Street Journal, “First Eagle dipped deeper into funds’ assets than allowed under a plan known as 12b-1 plan.” First Eagle will have to pay $25 million to reimburse shareholders, plus pay interest and a penalty of $12.5 million, reports Reuters.