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The Impact of Retirement Account Fees on Your Long-Term Wealth The Impact of Retirement Account Fees on Your Long-Term Wealth

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Paying fees is part of being an investor, as everything from mutual fund investing to a personal financial advisor can cost you. However, it’s also important to periodically review the fees you’re paying to ensure you’re not doing any long-term harm to your returns. For instance, depending on the size of your 401(k) or IRA, paying the equivalent to a third of your monthly contributions in fees could be totally normal, or it could be way too much. Learning more about how these fees work can help you make a better decision for your future.

Do you have questions about saving for retirement? Speak with a financial advisor today.

Understanding Retirement Account Fees

Account fees are the price that your portfolio manager charges for their services or the cost associated with some investments. Specifically, these fees tend to pay for three main categories of services:

Administrative Services

These are the operational and client service expenses of a portfolio management firm. They pay for the business’ overhead, and for client-facing expenses, such as customer service and web portals.

Standalone Offerings

Some portfolio managers offer individual client services, such as personal financial counseling. In these cases, some portfolio fees will go to pay for these services if you utilize them.

Investment Management

This is the core of what a portfolio manager charges for. This covers setting an investment strategy, buying and trading assets and otherwise managing client portfolios overall.

To pay for these services, portfolio managers tend to charge three main types of fees:

  • Percentage-based fees: This is an ongoing, pre-set cost that the firm charges to manage a given portfolio. Typically, these use an account size tier-based approach that charges annual percentages according to their proprietary brackets. For example, a portfolio might charge a 1% annual management fee, meaning you’ll pay 1% of your portfolio’s balance annually, typically divided into monthly payments.
  • Fixed fees: A firm might set individual fees for specific services, like counseling or financial planning. In some cases, these may be a bundled aspect of the account and integrated into other existing costs.
  • Commissions: These are more rare, but some investments may have commission-based costs associated with them. Financial advisors are typically held to a fiduciary standard that’s designed to ensure they’re maintaining clients’ best interest first and foremost, though.

Average Fees for Retirement Account Management

According to data from the 2022 401k Averages Book, average fees for a 401(k) managed portfolio hover right around 1%. For example, accounts within a large 401(k) plan (about 1,000 participants and $50 million in cumulative assets) will pay an average management fee of 0.88%. That figure is higher for small 401(k) plans (about 100 participants and $5 million in cumulative assets), as the average management fee for these is 1.19%.

On the flip side, mutual fund, comparably tend to charge between 0.65% and 1.24% for individual investors, according to 2022 data from The Pew Charitable Trusts. However, investing on your own like this can have its own pitfalls, as you’ll need to manage your investments more closely over time.

How Do Fees Affect Your Account’s Value Over Time?

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No one wants to pay fees for anything in life, but that can be the figurative price to pay for professional investment services. A firm most people would prefer to work with will manage your portfolio, explain the details of investing, retirement and finance and provide attentive service. Ideally this firm will also generate strong, risk-balanced returns for you, specifically over the long term.

In some cases, even seemingly-low fee portfolios can cost a lot of money without comparable gains. For example, take an investor who puts $100,000 into their 401(k) over a period of 20 years. With the S&P 500 historical average return of 10%, they might pay the following fees:

  • No fees
    • Final balance: $672,752
    • Fees paid: $0
  • 1% annual fee
    • Final balance: $560,440
    • Fees paid: $112,312
  • 1.5% annual fee
    • Final balance: $511,203

    • The Hard Truth About Retirement Contribution Fees

      The Hard Truth About Retirement Contribution Fees

      Let’s talk numbers. Imagine paying a jaw-dropping $161,549 in fees for your investment portfolio. That’s more than what some people start their savings journey with. Yes, you read that right!

      For 20 long years, a 1% annual management fee relentlessly gnawed away on an investor’s hard-earned money, leaving them bewildered and shortchanged. To put it straight, every 0.5 percentage points wolfed down more than $50,000 of their savings. It’s like watching a hungry hippo devour everything in sight.

      Now, hold your horses. It’s not all doom and gloom. For sure, many asset managers provide top-notch financial services, but here’s the catch – make sure you’re getting your money’s worth. It’s like going to a fancy-pants restaurant and expecting the juiciest T-bone steak for the price you pay.

      Retirement Portfolio Tips

      • Find a financial advisor who can be your guiding light through the maze of retirement investments. No need to break a sweat. SmartAsset’s free tool spoon-feeds you up to three screened financial advisors in your area. If you’re ready to take the plunge, schedule a free intro call to pick your money maestro. After all, finding the right advisor is like finding your favorite pizza joint – it should just click.
      • Don’t let portfolio fees swindle you. With the right firm, those fees are a small price to pay for invaluable services. So before you make it rain with your savings, dig deep and see what’s on the menu.

      Photo credit: ©iStock.com/Srdjanns74, ©iStock.com/Hiraman

      The post The Equivalent of One-Third of My Monthly Retirement Contributions Gets Eaten Up by Fees. Am I Getting Ripped Off? appeared first on SmartReads by SmartAsset.

      The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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