There’s now a fee-disclosure rule from the Department of Labor, which means that financial pros now have to disclose every cost associated with the services and products they provide. Nonetheless, a disclosure will not elaborate in details of dollars and cents. A good practice in personal finance is to nitpick where your money is going. To truly understand how you’re being charged, you need to know what these fees are called and how they’re calculated.
In retirement savings, these fees are usually described as percentages of the assets in an account, which are then snipped off from annual returns or made into an investment’s share price. It’s no wonder that so many boomers thought that they didn’t pay fees in their retirement. In fact, a median-income couple who both work would pay around $155,000 in investment fees over four decades. That amounts to almost a third of their entire retirement savings returns.
Where can you find these fees that you didn’t know you were paying? To give you an idea, the following are some costs that bear closer inspection:
- Brokerage costs – Have you been patting yourself on the shoulder for finding the broker with the lowest commissions? Make sure that he’s not compensating for that with annual inactivity fees, maintenance costs, liquidation fees, access data feeds fees, and trading tools fees. Otherwise, you might want to switch to another that doesn’t harbor a penchant for hidden fees.
- 401(k) administrative fees – Make plans to see your company’s employee retirement plan’s summary plan description or inquire at HR if the company pays the 401(k) administrative fees. If the fee is quite steep, you might want to continue contributions only until you’ve maxed out the company match and then arranged additional savings to a self-managed individual retirement account.
- Mutual fund management fees – Thanks to the expense ratio, when the account balance increases, so do the fees. With actively managed mutual funds, the usual expense ratio is 1.31 percent. With index mutual funds, the usual expense ratio is 0.71 percent. This bears a closer look to determine what is worth your while. As you know, what you pay in fees is effectively money that doesn’t get to compound and grow in your account.
When it comes to personal finance, you might also want to look into your own advisor’s money management fees.
It does seem like the world is rife with hidden and unnecessary fees, so in terms of dealing with the financial pros, the best way to find out exactly what you’re paying for is to ask.