As consumers, we’re used to paying for services. We expect fees on most of the services we use because we know people deserve to be paid for the things they do for us. When we know what those expenses are, we can plan accordingly and all is fine. However, if we’re in the dark about them, problems can arise.
That is especially the case in the world of investing. What many don’t realize is that the investing world is rife with fees that only make it more difficult to accomplish what your hard earned money is trying to do – grow. If you take a look at the list below, you’ll likely see at least one that you may be paying without realizing it.
If you’ve not heard of 12b-1 fees, don’t be surprised. 12b-1 fees are a part of what is considered the overall expense ratio of a mutual fund. Most mutual funds will charge for things like administrative and management fees which are a known amount. What makes the 12b-1 fee particularly nasty is it’s a fee that’s used simply to compensate advisors to market the given fund.
Simply put, you get nothing out of paying a 12b-1 fee. You receive no special service for it. It’s simply there so someone can market the fund. Suffice it to say, this can create a conflict of interest for many advisors as they can be inclined to direct you to one fund over another. This is not a guarantee, of course, but is something that definitely should be kept in mind when looking at mutual funds to invest in. FeeX offers a free tool to help you weed out those funds so you can get into ones that will put more of your money to work for you.
An Annual Fee
Annual fees are hiding in many places within the investing industry, but can largely be found within brokerages. At its core, this is simply a money maker for the broker and can be found from online brokers to advisor-led managements. In many instances you receive nothing as the client but are simply charged for having an account.
Annual fees vary widely within the industry, with the most common ones charged due to not being active in your account for a certain period of time to being below the minimum balance threshold. The amounts charged can vary anywhere from $50 per calendar year to upwards of hundreds of dollars. If you invest through an online broker or pay someone to manage your investments you owe it to your future self to dig into what you might be charged so you can decide what to do.
401(k) Plan Fees
Many of us have 401(k) plans and they can be great for retirement planning. The Department of Labor put changes into effect in 2012 to bring greater transparency to 401(k) fees, though doesn’t mean they’re fee free. Some of those fees can be:
- Investment fees
- Plan Administration fees
- Individual services fees – this is sort of a catch-all category such as rolling over an old 401(k) to taking out a 401(k) loan.
If the small percentages of your 401(k) fees seem meaningless to you, consider this example from the Department of Labor:
- If you start with a 401(k) balance at age 35 of $25,000 the impact of 1 percent in fees equates to a difference of $64,000 or 28 percent over the span of 35 years – assuming a 7 percent annual return.
What many don’t realize is you have power as an employee to help change some of these fees. Take a look at the fund options in your plan. If they’re too high, then speak with your Group Benefits area and ask them to consider other lower cost options. They are there to serve you, so take advantage of it.
Investing for your future requires educating ourselves as to what our investments are doing. A large part of that is the amount we’re paying to do said investing. Ultimately, you’re helping your future self by knowing the cost associated with your investing.