Hidden Fees That Eat Your Retirement Alive

You hear a lot about the unfortunately high cost of 401(k) plans, and they are a walking disaster. But even ordinary savers and investors can fall victim to hidden fees in their retirement plans.

Fees are a big deal. A number that seems small, say 1%, adds up over time to be a large percentage of your potential gains. That’s money that leaves your account each and every year, irrespective of your investment performance.

Worse, it’s very likely you’ve lost touch with the original advisor who set up your plan, yet he or she is still raking money off your accounts, quarter in and quarter out.

What should you watch out for? Here are five ways that fees can zap your returns for retirement:

1. High advisor fees

Advisors have a right to ask for compensation for their services. Fee-only planners charge by the hour and that’s easy to manage. Advisors who charge you a percentage of your assets are harder to track. Many try to get 1% at a minimum, even through they might spend an hour a year talking to you about your investments.

2. Expensive funds

That advisor now has to go and buy investments on your behalf. Some advisors are stock pickers, but most just outsource that work to mutual funds. The underlying funds vary in price, but you can expect the cost to add up to another 1.25% easily enough. So now you’re in the hole for 2.25% a year, every year.

If inflation runs about 3%, the advisor takes 2.25% and the market returns 7%, you end up on the short end of the stick for sure.

3. Excessive trading

Investors often think trading is the way to earn profits. Buy low and sell high, on infinite repeat. What they don’t realize is that each move in and out of a position costs them real money. First, there’s the commission for the trade. But there’s also the “bid-ask spread,” the gap between the money they seek for a given holding and what the market will pay, or vice versa.

Index fund spreads are very narrow, since so many people own them. Individual large-cap stocks are often wider, and small cap stocks and other more volatile investments can have huge gaps in price. All of this activity runs up your expenses. Trading mutual funds is even worse, since you often pay $50 to buy or sell them.

 4. Too much, or too little, risk

A study by the benefits consultant Aon found that an enormous number of investors have too much risk for their relatively older ages, while a shockingly large number of young people take on too little risk.

A portfolio that is balanced to match your ability to withstand risk is important for both young and old. A young investor who is too conservative might not keep up well with inflation, while an older investor with too much in equities risks losing money in a rapid downturn near retirement.

5. Unnecessary taxes

Finally, maximize your 401(k) and IRA options before you begin to save money in taxable accounts. Compounding wealth is powerful. Compounding tax-deferred wealth puts that power on mathematical steroids.