Watch the Fees in Your Retirement Savings

How are fees impacting your retirement savings? Even though they might be just 1% today, with the law of compounding, those fees can have a sizable effect, amounting to almost 30% of your final portfolio. 

If you are like most investors, you have been focusing on your returns and have no idea how much fees are eating into your retirement earnings. But it’s important to keep your eyes on the fees for your mutual and exchange-traded funds because they take a toll on potential investment returns over time. The more you have paid into your retirement fund, the more you will pay in fees because the fees are based on a percentage of assets.

There is a cost associated with taking money out of a portfolio to cover fees:
The percentage of value lost to fees climbs higher as years pass. Every dollar taken out to cover management costs is one less dollar left to invest in the portfolio to compound and grow.

As an example, paying out the same amount in fees at ages 45 and 65 causes the percentage lost to fees to increase from 12% to more than 25%, even if both accounts have the same rate of return. The impact can mean the difference between retiring at age 70 and having to wait until 73.

You could be paying 2% or more in fees – enough to have serious long-term effects. Here’s what to look for:

  • Expense ratios — Annual fees charged by mutual funds, index funds and exchange-traded funds (ETFs). Expense ratios are a percentage of your investment in the fund and apply to these funds whether they’re in your 401(k), IRA or brokerage account.
  • Mutual fund transaction fees — Charged when a broker buys and sells mutual funds. They are similar to a trade commission that a broker charges to buy or sell a stock.
  • Sales charge or commission — A broker may have sold you a fund with what’s known as a sales load, meaning a charge or commission.
  • Administrative fees — Charged just for maintaining your account.

Check fee disclosures and look at the expense ratios on the mutual funds you are invested in. Consider a lower-fee mutual fund if you find you have some funds in your 401(k) that have expense ratios of more than 1%.

Another factor to consider — how much advice are you getting? An actively managed fund costs more than does an index fund or an ETF. A robo adviser is cheaper than a human adviser. Savings are good, but there is a balance to strike: If the market is tumbling, you would want a human who knows your personal situation and can reach out to you with the information.

Especially if you are a millennial with decades to save for retirement, realize that you do not want decades of exposure to avoidable investment fees. Do not sacrifice the returns you will have time to reinvest. Put money aside for savings to compound and grow without investment fees eating into your future savings.

Pay attention to how much fund fees are affecting your retirement savings. Not all fees are bad — some ensure your investments are managed well. But make sure you are getting good value without letting excessive fees cut into your returns.

You can count on Ericson, Scalise & Mangan, PC to provide you with sound guidance and experience in these uncertain times. For assistance with your legal needs, please contact us today at (860) 229-0369, or email us at info@esmlaw.com.