Are Fees Affecting Your Retirement Plans?

By Neal Clements, CPA / PFS / ABV

President, Pile Wealth Management

According to a recent publication by the Department of Labor, a 1% excess fee in your retirement account could reduce your retirement investment balance by 28% over a 35 year period. While this may be a worst case scenario, it does demonstrate the effect that fees have on your retirement portfolio over a long-term period.

In October, 2010, the United States Department of Labor issued A Look At 401(K) Plan Fees. This publication is intended to educate 401(K) administrators and investors about the importance of examining the fees and expenses that may be paid by your 401(K) plan. This information is relevant not only to 401(K) plan investors but to all long-term investors.

Mutual fund investments charge fees to their investors in a variety of ways. As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment management fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns.

Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses." Funds typically pay their operating expenses out of fund assets — which means that investors indirectly pay these costs.

SEC rules require funds to disclose both shareholder fees and operating expenses in a "fee table" near the front of a fund's prospectus. The lists below will help you decode the fee table and understand the various fees a fund may impose:

	Sales Charge (Load) on Purchases — the amount you pay when you buy shares in a mutual fund. Also known as a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund. According to FINRA rules, a front-end load cannot be higher than 8.5% of your investment.
	Purchase Fee — another type of fee that some funds charge their shareholders when they buy shares. Unlike a front-end sales load, a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund's costs associated with the purchase.
	Deferred Sales Charge (Load) — a fee you pay when you sell your shares. Also known as a "back-end load," this fee typically goes to the brokers that sell the fund's shares. The most common type of back-end sales load is the "contingent deferred sales load" (also known as a "CDSC" or "CDSL"). The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough.
	Redemption Fee — another type of fee that some funds charge their shareholders when they sell or redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund (not to a broker) and is typically used to defray fund costs associated with a shareholder's redemption.
	Exchange Fee — a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group or "family of funds."
	Account fee — a fee that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount.
	Management Fees — fees that are paid out of fund assets to the fund's investment manager for portfolio management, any other management fees payable to the fund's investment manager or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category (discussed below).
	Distribution [and/or Service] Fees ("12b-1" Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.
	Other Expenses — expenses not included under "Management Fees" or "Distribution or Service (12b-1) Fees," such as any shareholder service expenses that are not already included in the 12b-1 fees, custodial expenses, legal and accounting expenses, transfer agent expenses, and other administrative expenses.

Investors should select mutual fund investments that eliminate or reduce the fees mentioned above. We only select mutual funds that do not pay fees to us and that have low management fees. We particularly like the DFA Family of Mutual funds because they only charge a management fee that is reported in the expense ratio and their structured, scientific approach to investing, allows DFA’s investment management fees to be positioned below those of typical, traditional active managers. Their patient and price-conscious buy-and-hold approach to trading is designed to minimize costs.

For a more detailed explanation of 401k fees, please read an article from the U.S. Department of Labor entitled “A Look At 401k Plan Fees”.

If you are concerned about the fees that you may be paying within your investment account or your 401(K) plan, we would be happy to prepare an analysis of the fees that you are currently paying and perhaps a recommendation to help reduce those fees.