At the supermarket, shoppers receive detailed receipts of purchases. After restaurant meals, wait staffers hand diners itemized bills. But call out “Check, please!” to a financial services provider and the result might be a rundown of cryptic line items — 12b-1? Expense ratio? Or a passing reference to Part 2 of Form ADV.
Thanks to a new fee-disclosure rule from the Department of Labor, financial pros who offer retirement advice will have to disclose all costs associated with their services and products beginning in April.
But a disclosure that meets the letter of the law might not tell you exactly how much you’re paying in dollars and cents. To find out, you need to know what those fees are called, where they’re referenced, and how they’re calculated.
WHAT’S MISSING FROM YOUR RETIREMENT SAVINGS STATEMENT: “Amount due for fees” isn’t a line item most investors will find in their statements. Instead, fees are typically expressed as a percentage of the assets in an account and then skimmed off the top of annual returns or baked into an investment’s share price.
The lack of clarity might explain why 46 percent of full-time employed baby boomers polled by investment advisory firm Rebalance IRA in 2014 said they believed they paid no fees in their retirement accounts.
If only that were true. Based on average contribution rates, 401(k) fees and plan costs, a median-income couple, both of whom work, would pay nearly $155,000 in investment fees over 40 years, according to public policy organization Demos. That’s almost a third of their total retirement savings returns.
Fees charged by mutual funds within 401(k) plans are on the decline, but all-in costs — including plan administrative fees — often depend on factors including plan size, total assets, service levels and fee structure that are largely outside of an individual consumer’s control.
START DIGGING FOR FEES HERE: If you know what you’re looking for, it’s a lot easier to find the fees buried in 401(k) plan summaries obscured by jargon in mutual fund prospectuses. Here’s where to point your head lamp:
BROKERAGE COSTS: The broker with the lowest commissions might not be the best deal. Investors who trade infrequently should look out for annual inactivity fees and maintenance costs (which can range from $50 to $200 combined). There are also transfer or liquidation fees ($50 to $75 for a full or partial transfer) and fees to access data feeds and trading tools, which can range from $5 to $50 or more per month for real-time quotes to hundreds of dollars for premium reports.
401(k) ADMINISTRATIVE FEES: Some employers match a portion of each employee’s retirement plan contributions, and the most generous also kick in for the costs of recordkeeping, compliance and investment curation. That tab is usually about 1 to 2 percent annually, charged as a percentage of assets. If the fee is on the high side, consider investing in the 401(k) only until you’ve maxed out the company match and directing additional retirement savings dollars to a self-managed IRA.
MUTUAL FUND MANAGEMENT FEES: Want a new way to say “fee”? Crack open a mutual fund prospectus where sales commissions and management and administrative costs are referred to by names such as “loads” and “12b-1 fees.” The double blow of the “expense ratio” is the most costly of all: First, as the account balance increases, so does the amount skimmed off the top to cover fees. And every dollar paid in fees is one fewer dollar left to compound and grow.
At the high end of the fee spectrum are actively managed mutual funds helmed by investment managers, which carry an average expense ratio of 1.31 percent, according to the trade association Investment Company Institute. Index mutual funds, which have an average expense ratio of 0.71 percent, are a lower-fee alternative. They’re cheaper because they’re automated to match the return of a particular market index. In the middle are target-date mutual funds — a hybrid of active management and index investing — with an average expense ratio of 0.94 percent.a