In the short term, retirement plan fees can seem negligible. But these costs add up over the years and can have an outsized impact on your nest egg. The SEC has demonstrated that a $100,000 portfolio with a 4 percent annual return and a small annual fee of 1 percent would see its earnings reduced by $30,000 over 20 years.
Without context, a single percentage point can seem like a small difference when comparing retirement plans; but it can easily be the difference in you being able to buy a new car or pay for a grandchild's college education.
The main retirement plan fees
There are two categories of fees and costs associated with retirement plans:
Transaction fees are charged every time you buy or sell a product such as a stock, mutual find or exchange-traded fund. If you decide to invest in mutual funds, you will generally have to pay a sales loads, which goes directly to the person selling the fund.
Trading a security through a broker means that you will pay a price that is slightly higher than the market price, or that you will sell it at a price that is slightly below the market price. These differences are called markups and markdowns, and many investors fail to assess how they impact their investments.
Transaction fees also include transfer fees, which are a one-time fee you must pay if you decide to transfer your money to a different financial institution. You may also have to pay a closing fee for your old IRA.
Check your plan documentation to find out about ongoing fees, including:
- Fund management fees. These fees are incurred when you add certain products to your portfolio. An index fund would typically carry an annual management fee of 0.10 percent, while an actively-managed option such as a stock fund typically costs about 1 percent a year. Note that these fees are added to what your IRA provider already charges if you chose a managed retirement account.
- Advisory fee. Most professionally managed IRA providers will charge you a 1 percent annual fee for this service or more. GuidedChoice offers an annual fee that is much lower than average for a professionally managed IRA.
- Service fees or custodial fees. These are administrative fees that cover the cost of sending documentation and reports.
- Insurance fees. You might be charged insurance premiums if you are purchasing an annuity.
How to minimize costs and avoid penalties
The seven steps below can help you reduce costs and completely avoid some of the fees you may have been paying.
- Educate yourself
Start by finding out how much you are currently charged for your retirement plan. Review the plan documentation and the documentation for each of the investment options you have selected. Ask questions about fees that are unclear to you.
- Compare investment options
Take annual fund management fees into consideration when comparing your investment options, since these will be added to what you already pay your IRA provider. The return is an important thing to consider, but keep in mind that higher fees will sometimes offset the return of a product such as a stock fund. When considering an investment product, always check to see if there is another option with lower fees that would help you meet the same goals.
- Choose the right IRA provider
You can save on transaction fees by choosing a financial institution that offers some of the funds and ETFs you want to invest in since clients typically get preferential pricing for these products. Besides offering lower initial transaction fees, the right IRA provider should deliver quality professional advice so you can invest your money in the right products and keep active trading to a minimum.
Another important thing to look for is an all-inclusive fee structure. You will receive a detailed fee schedule and will know exactly how much the IRA provider will charge for their services. The transparency of this approach will make it easier to calculate how fees will impact your nest egg in the future.
- Avoid administrative fees
Some IRA providers charge a flat annual administrative fee; others will waive this fee if you meet certain requirements, such as having an account balance over a specific amount or making regular contributions.
If you are still receiving statements, reports and other documentation in the mail, you might also be able to qualify for lower administrative fees by going paperless. Administrative fees range anywhere from $10 to $50 a year - some financial institutions charge even more. Not only can that move save you thousands over time, but it will also help you save time with record-keeping.
- Get the most out of advisory services
If you are saving with a managed IRA, you will pay an annual advisory fee - typically, 1 percent of your account balance. The key is to find an IRA provider that details the advisory services you will receive, uses an all-inclusive pricing model and consistently delivers quality advice. A financial adviser can be well worth it as they help your balance grow by choosing investments tailored to your needs and assisting you with financial planning.
One way to reduce your fees, though, is to use a robo-adviser instead. They will typically charge about 0.60 percent per year and provide automatically personalized investment recommendations aligned with your goals and preferences. While a robo-adviser is a good fit for some, other investors prefer the human relationship element. As a portfolio grows more complex and requires more sophisticated planning, a robo-adviser may not be the best fit.
- Make fees a part of your investment strategy
Calculate the impact different rates will have on your retirement account in the long-term when you make investment decisions. For instance, you may want to focus on long-term investments with a steady return instead of opting for products that will require you to buy, sell or exchange more frequently.
Start by finding out how much you have been spending on fees so far with this IRA fee checker. If you feel that you are spending too much on fees, think about switching to a different type of IRA or to a different IRA provider.
- Start an emergency fund
You can easily avoid the early withdrawal penalty. You will be charged a 10 percent penalty on top of the money you withdraw counting towards your taxable income if you make a withdrawal before you turn 59 ½. There are exceptions to this rule, but it is best to avoid touching your nest egg until you retire. Your best defense against this penalty is proper financial planning so you have an emergency fund you can use instead of withdrawing from your retirement account.
Comparing IRA accounts
You can save for retirement more efficiently by selecting the type of IRA that is the best fit for your goals. Compare tax advantages, calculate how much you can contribute to your IRA and figure out what your income should be during retirement.
Because the process can be so complex, GuidedChoice offers a concierge service. All you have to do is schedule an appointment, and a professional will work with you to objectively find the best IRA on the market based on your goals and preferences.
If you want to open your first IRA or are thinking about switching to a different type of account to reduce fees, this comprehensive guide will help you explore your options and evaluate the criteria you should keep in mind when comparing IRAs.
If you feel that a managed IRA would be the most relevant option for you, GuidedChoice offers professionally managed accounts with a fully transparent, all-inclusive fee structure. You can open an account in 5 to 10 minutes, get help with a rollover from a 401(k), receive personalized investment advice and benefit from fees well-below the industry average.