How Much Are You Paying to Invest Your Money?

If you’re already on top of your finances and investing ten percent (or more!) of your income in a retirement fund, congratulations! You’re exactly where you should be, and way ahead of many Americans who don’t have any savings at all. Your 401(k) or IRA plan should help you reach your retirement savings goals over the course of your career so you can enjoy financial independence when you reach the end of your working years.

Once your retirement fund is set up, you can’t just fly on autopilot until you hit age 65, though. You still need to stay well informed about exactly how your money is being managed. One major bit of information you need to know is just how much you’re paying in fees for the privilege of investing your money.

Chances are good that, like most people, you don’t give your 401(k) much thought. However, take the time to understand the fees you pay to invest, because they can add up if you’re not careful. Here are the major fees you might be paying to invest in your retirement.

Account Fees

Depending on the type of investment accounts you have, you’re probably paying account fees. This is typically an annual fee paid to cover the management of your account. It’s how financial planners make money, and they earn that fee by changing your investments as needed by the current vagaries of the market.

When your manager is doing a great job, they stay ahead of market trends to earn you the best return on your investment. Some advisors work on a commission, which is a percentage of the returns they earn for you. Others charge a flat fee at the beginning of each fiscal year for their services.

To find out what your account fee is, all you have to do is ask. You should also check to see that you’re getting your money’s worth for the amount you’re paying. A commission is straightforward, but if you’re paying a flat fee, check your account’s buying and selling records to be sure your manager is rebalancing your account regularly and making adjustments appropriately.

Mutual Fund Expense Ratios

Mutual funds contain a mix of investments and are actively managed, so fees are needed to cover salaries and other overhead. This fee is called the expense ratio, and it’s a simple percentage of your investment.

Mutual fund fees vary widely, from as low as .20 percent to ten times that amount. Expense ratios can also change over time, so it’s important to check them regularly. Though funds with international stocks are more expensive to operate than domestic ones, a general rule of thumb is that you shouldn’t pay more than a one percent expense ratio for any of your mutual fund investments.

Brokerage Commissions

In addition to the expense ratios of your mutual funds, look out for transaction fees and brokerage commissions when you buy, sell or trade your investments. These fees aren’t always clearly disclosed, but they can make a big dent in your returns if your account manager does a lot of trading to play the market.

Why Understanding Your Investment Fees Matters

Over time, each one of those fees can add up to a large chunk of your return on investment. For example, if you pay a one percent fee to your account manager, a one percent expense ratio on the mutual funds they have chosen, and then you average a half-percent fee on trades, you’re paying a total of 2.5 percent for the privilege of investing your money.

In a slow year, you might only earn 2.5 percent in returns overall, which means you’re not really earning any profit once your fees are paid. Likewise, you shouldn’t be too excited about a year in which you make 7 percent returns. It’s really only a respectable five percent when you consider the fees.

If you’re concerned your fees are too high, talk to your financial adviser. They should be more than willing to break down the costs of your investments and explain what you may or may not be getting out of those fees.

If your portfolio is doing well and consistently beating the market average, you may decide that your fees are worthwhile. If not, consider exchanging expensive mutual funds for low-cost index funds, which are tied to the overall market average and require little active management.