If you want to guarantee a happy, stable retirement, it’s important to start saving — and investing — now. Unfortunately, hidden fees can wreak havoc on even the smartest investment strategies. Along with consulting fees, you might find yourself dealing with fees to trade, fees to advise and even high taxes. Watch out for these 15 hidden fees so you can avoid wasting your money in retirement.
1. Advisory Fees
While financial advisors need to eat and pay rent just like anyone else, the rhetoric they use to express how much you’re being charged might be hard to decipher. Advisors often talk in “basis points,” which simply means tiny fractions of a percentage point. For example, 1% comprises 100 basis points, and 50 basis points are equal to 0.5%.
Depending on your investment, advisory fees can be some of the highest fees you’ll pay.
How Much Advisory Fees Cost
An advisory fee of 1% is typical, but you need to understand what 1% of your assets will cost you. Let’s say your portfolio is valued at $500,000. If you’re being charged a 1% advisory fee, you’ll have to pay $5,000 annually.
2. 401(k) Expense Ratios
Many mid- to large-sized companies offer 401(k) plans, but many people who contribute to them don’t realize that these retirement savings plans aren’t free. Depending on the funds you select, you could be stuck with high expense ratios that will slowly chip away at your hard-earned retirement savings. And, these expense ratios might not be explicitly expressed to you.
Choose Funds With Low Expense Ratios
Your expense ratio might be somewhere between 0.5% and 2%, which doesn’t seem like much. But, just as compound interest accumulates over time, so does a 2% expense ratio that’s working against you. So, when you’re picking funds for your 401(k), try to choose ones with low expense ratios.
3. 12b-1 Fees
Here’s one of the most important things to know before investing in mutual funds: 12b-1 fees are the annual marketing or distribution fees on some mutual funds, and they’re typically included in a fund’s expense ratio.
Initially, 12b-1 fees were introduced to help investors by marketing a mutual fund to yield higher assets and lower expenses. However, some experts argue that 12b-1 fees can bring down your returns instead of improving your fund’s performance.
Why 12b-1 Fees Matter
In September 2015, the Securities and Exchange Commission filed proceedings against First Eagle Investment Management, an asset management company that allegedly used investors’ mutual fund assets improperly for payments to cover “marketing and distribution of fund shares.” According to The Wall Street Journal, “First Eagle dipped deeper into funds’ assets than allowed under a plan known as the 12b-1 plan.”
First Eagle had to pay $25 million to reimburse shareholders, plus interest and a penalty of $12.5 million, Reuters reported.
4. Annuity Fees
A type of insurance that pays out a fixed sum to the holder every year, annuities can be a great product for people who want to receive a regular income stream for the rest of their lives. But, this kind of contract can come with some hidden surprises.
Why Annuity Fees Can Cost a Lot
Some notoriously high fees include commissions by the people who sell the annuities. These charges can soar as high as 10%, reported CNN Money. There are also surrender charges, which come into play if you decide to withdraw money in the first few years. These fees can range from 7% to 20% in the first year. Additionally, annual insurance fees, investment management fees and insurance rider fees on annuities can cost you a significant amount.
5. Yearly Fees
Mutual fund fees can be broken down into ongoing yearly fees and loads, and both can seriously eat away at your returns. Ongoing yearly expenses usually include a management fee — between 0.5% and 2% of the assets, according to Investopedia — administrative costs and the 12b-1 fee.
High Expense Ratios Don’t Always Mean High Returns
It’s important to note that there’s no clear correlation between high expense ratios and high returns. In other words, even if your ongoing expenses are high, it doesn’t necessarily mean you’ll enjoy high returns.