It’s a popular misconception that you don’t pay investment fees for your 401(k). That misconception also exists regarding investments fees in IRAs and brokerage accounts. If you don’t see if it doesn’t mean that it isn’t there.
Investment fees decrease your investment return
All things being equal investment fees decrease your investment return. The General Accounting Office estimates an additional 1% fee over 20 years would reduce an account balance at retirement by about 17%.1 You may not be aware but you can often have the same investment as someone else and you are both paying wildly different investment fees.
The Financial Industry Regulatory Authority (FINRA) has a fee analyzer to help you understand the costs associated with your investment choices. And it is free.
IRA investment fees
In addition to paying investments fees to your broker or advisor (there is a difference ), you may be paying account fees to several different custodians such as Fidelity, Charles Schwab and TD Ameritrade. You may have three different custodians because you’re working with three different advisors. Some people do this in search of diversification. However depending upon your account size the downside of this is that you’re paying three custodial fees versus just paying one fee. In fact some custodians stop charging account fees when your balance reaches a certain dollar amount so consolidating would actually decrease your fees.
The higher the investment fee the better the manager?
I once heard from an attorney that a certain well-known investment company charges more because they are worth it. While that is a great statement for the company to assert, is it really true? No firm in the investment industry can guarantee you future returns. Morningstar, a leading evaluator of investments, says that the greatest predictor of future investment success is to control cost.
What can you do about investment fees?
I recommend using the Financial Industry Regulatory Authority’s (FINRA) investment fee analyzer. If you feel that to be a daunting task or if the output confuses you, we would be glad to help you assess. It is important that you understand the risk adjusted return of your portfolio. High cost is a risk. Poor management is a risk. At the same time you must take on some level of risk to grow your money to reach your objectives. Ideally taking on risks that you understand and can live with. All risks are not worth taking. We look forward to helping you directly or finding out what you learned.
(1) PRIVATE PENSIONS, 401(k) Plan Participants and Sponsors Need Better Information on Fees, 2007
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(3) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
(4) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IL, MI.