Individual retirement account (IRA) assets in the U.S. are worth $7.5 trillion; this represents 31 percent of total retirement assets in the market, with 34 percent of U.S. households owning an IRA. Banks, investment houses, brokerages, online trading firms and other entities all want a piece of that gargantuan pie.
That is why where you choose to open your individual retirement account (IRA) can make a huge difference in how much money you accumulate. Since returns are presented net of fees, investors do not see how much they would have earned with lower fees. That means many account holders are allowing a sizable piece of their retirement assets to get eaten up by excessive IRA fees.
People recognize the savings in a 1 percent drop in their mortgage rate - and will refinance to get it - but do not consider the impact an extra 1 percent in fees has on their retirement nest egg. Paying one or two percentage points in fees may seem trivial, but the impact is huge. Paying 1 percent annually in fees on a $100,000 IRA balance could cost you approximately $28,000 over 20 years.
Taking a look at fees on retirement accounts is critical, whether you already have an IRA, are looking to rollover money from a retirement savings account such as a 401(k) at a former employer, or are just starting to save for retirement. As an account owner, you should understand the fees you are paying and what other options may be available.
Five fee types
Minimizing your costs for an account is one of the best ways to improve your retirement savings results. When researching IRAs, look to see which of these IRA fees you are paying on your investment earnings.
- Fund management fees are unavoidable. They address the cost to run and administer mutual and other funds. However, they vary greatly by the type of fund and assets it holds. Stock funds typically have higher fees than bond funds. Actively managed funds cost more than index funds.
- Custodial and service fees are usually inescapable, too. These are the charges one pays to have an account and may be labeled as "maintenance fees" or "account service fees."
- Trading commissions are charged when you buy or sell an investment. There are some "commission-free" accounts, as noted below, but they typically have higher costs elsewhere to offset the savings.
- Advisory fees are incurred when one invests through a financial adviser, whether a human or a robo-adviser. Many people prefer to make their own decisions on investments, but others prefer algorithms or registered advisers. Be aware that the average independent adviser charges clients 1.03 percent of the assets managed in fees yearly. (However at GuidedChoice, this is not the case)
- Transfer fees are the costs companies charge when you want to shift all or part of your money to another custodian.
So-called 'no-fee' IRAs
Some IRA providers claim to offer "no fee" IRAs. In reality, however, there is no such thing. Everyone who has a 401(k), an IRA, or similar retirement savings account pays fees. They typically are waiving one type of fee but charging higher ones in other less obvious areas.
The Financial Industry Regulatory Authority (FINRA) sent a notice to firms it regulates about misleading marketing campaigns that boldly proclaim that certain "fees are not charged," and do not make it obvious that other fees are involved. FINRA emphasized the need for brokers and their communications to be be fair and complete, with no omissions of material information on fees. Any claims regarding fees "must be accompanied by clear disclosure of the types of fees that may be charged."
Pouring through your statement or other materials with lots of fine print may make it difficult to discern what fees are being charged and for what. However, the provider does need to make it clear if you are not sure.
There are ways to ensure that your IRA fees are not exorbitant. Some companies waive some fees for electronic-only access because they save on mailing statements and such to account holders. There are also companies out there that offer IRAs with very low fees for management and administration of the account.
To find out exactly what you're paying, check your fund or IRA custodian's website. A well-run company is transparent about fees and will post clear fee information. However, looking at their fee disclosure information will not tell you if they are on the high or low side. Fortunately, now there's an easy way to see what you're paying in fees: GuidedChoice's new IRA fee checker. The tool shows the fees you are paying now - including hidden ones - and compares your current IRA to less expensive alternatives.
The limit on the amount people can save in an IRA each year is set by the IRS. Yet two investors contributing the same amount over the same time period will have vastly different results, partly because of investment choice and partly because of fees incurred. If your fees are too high, treat your IRA like your mortgage and "refinance" it to take advantage of a lower rate.
GuidedChoice offers a comprehensive guide to helping you sort through the IRA marketplace and evaluate providers. Additionally, they offer a concierge service that objectively determines the right IRA option for you. Whether that is with GuidedChoice or someone else, the mission of the service is to help you find the best option for your goals. Book your appointment today.