Recently my wife and I bought a range and stove. We never thought to ask the salesman how he was paid. I never contemplated whether or not the quality of my purchase was diminished by their cut. In fact, what was the wholesaler’s cut? We decided to buy a brand assembled in America.
How does that work with investments? I am only going to address the fee of the broker in this writing. The advisor to your plan could be a broker (Registered Series 6 or 7) of a broker/dealer or an investment advisor representative (Series 63, 65 or 66) of a Registered Investment Advisor (RIA). Broker receive commissions while IARs charge fees. Google “FINRA Selecting Investment Professionals” to learn more.
Investment fees- It’s not this minus that
One might think that the broker’s fees charged through commission would follow a uniform fee schedule. I assumed that when I purchased my fridge. In investments, you would be wrong. There are varying fee percentages. You both invest $5000, your spouse in an IRA and you in a 401(k).Let’s say you and your spouse or partner choose to invest in the very same thing. You probably would assume that you would both get the same return. Not so.
They may be paying a fee of 5.75% (575 basis points) and you may be paying a fee between 1% and 1/4 of 1% (25 basis points). Investment advisor representatives charge fees and brokers receive commissions. The company that manufactures your investments determines the commission schedule, known as share classes. Google “SEC Fee Analyzer” to learn more and to use their free share class analyzer.
Also, commissions and fees for the retirement plan professional aren’t the only fees you are charged in your 401(k). It is possible that the 401(k) investor is paying more fees than the IRA investor. Congress discovered that there are 17 different fees you may be getting charged. Your participant 401(k) fee disclosure will detail your fees.
Do investment fees matter?
Morningstar, the popular investment research firm, reported in “How Expense Ratios and Star Ratings Predict Success” that expenses not its star ratings were the best predictor of future returns. The General Accounting Office reported that a 1% fee would reflect in a 17% reduction in balance in 20 years. That appears to reduce and not enhance confidence in retirement income security. Demos an independent think tank reports for the average US household, the high fees drain about $155,000 from their 401(k) accounts over their lifetimes. One might think that if you pooled your $5000 investment to your company’s $5,000,000 total plan balance you would pay less. Not true. The Department of Labor agrees which is one of the reasons that it is ratcheting enforcement of its 2012 fee disclosure legislation. They are responsible for enforcing the Employee Retirement Income Security Act that governs your 401(k).
Investment Fees- 401(k) vs. IRA
On the IRA side, it is the investment manager and not the brokerage firm that determines the discounts. Some investment managers discount their fee if you invest over a certain dollar amount, called break points. You must weigh if the increased investment is worth it as compared to the flexibility of spreading your money around. That depends too if you have extra money. I recommend looking for an independent and unbiased investment advisor representative to give you a financial review. You may have to pay a small fee for an in depth analysis. If DEMOS is right, it would save you a lifetime of hurt.
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