Investing Fees: How Much Is Too Much?

5 Minute Read

To invest successfully for retirement, it’s important to be familiar with the rules of investing. One rule you may not think about often is that it’s impossible to invest for retirement for free. Just like anything else you do from grocery shopping to buying a car to going to the dentist, there’s a price of doing business.

That means fees—mutual fund fees and 401(k) fees—will have an impact on your ability to save for retirement. So you need to be an informed and wise consumer to find the best deals and understand when it pays off to pay more.

We asked investing professionals about how they handle the subject of fees with their clients. How can an investor calculate the effect of fees on his retirement plan? What role do fees play in the mutual funds they recommend? What about 401(k) fees? Can investing in your 401(k) ever be too expensive?

Why Worry About Fees?

“Obviously, the higher the fees and the cost of the fund, in general, the lower the return is going to be,” Clayton Shearer, an investing professional in Colorado, explained. “That’s because the fees come off the top of the fund’s return.”


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With his clients, Clayton uses the Rule of 72 to demonstrate how fees affect their retirement saving plan. “Just divide 72 by your return and the answer equals the number of years it will take to double your money,” he said.

For example, if you’re getting a 7% return on your mutual fund, divide 72 by 7. In that case, you’d double your money in 10.2 years. If that same mutual fund charges a 1% fee, then your actual return drops to 6% and you’ll need 12 years to double your money. A 2% fee means you need almost 14.5 years to double your money.

The U.S. Department of Labor illustrates the long-term impact of investing fees this way: An investor with a $25,000 balance who earns an average 7% rate of return and has fees of .5% can expect his retirement balance to grow to $227,000 in 35 years. If the fees are 1.5%, the balance will grow to just $163,000. That 1% difference in fees reduces the investor’s nest egg by 28%!

Fees Worth Paying

Clearly, fees are a fact of life. So, how can you make smart decisions about your investing costs?

“First, realize that while fees are important, they aren’t the main issue,” Tripp Hook, an investing professional in Washington, advised. “The main thing is for folks to be saving and have a plan and move forward on that.”

Your 401(k), for example, can seem like an expensive way to invest. Not only do you pay fees on the mutual funds you invest in, you also pay fees for the management of the 401(k) plan itself. But a workplace retirement plan with an employer match is still the best way to kick off your retirement savings strategy.

“When you have a 401(k), you’re looking at tax savings and matching dollars [from your employer], so if you’re still employed, it’s beneficial to use it,” Clayton said.

“I’ve personally never seen an instance of a 401(k) that was so expensive that it wasn’t worth participating in,” Tripp agreed.

Cost vs. Quality

When you invest outside your 401(k), however, you have thousands of mutual funds to choose from. What should you look for in a mutual fund to make sure you’re spending your money wisely?

Look for the value: “Low fees are just one part of a good fund,” Clayton explained. “The goal is to keep costs as low as possible while getting a good quality mutual fund that also fits the client’s situation, has good customer service, strong historical returns and good management in place. I’d never recommend a mutual fund based on low fees alone.”

Focus on the long term:  “Most investors are better off paying a higher commission up front and having lower ongoing fees,” Tripp said. Most front-load funds work this way. There’s a significant expense to get started, but the ongoing costs are usually lower than no-load or back-load funds—perfect for long-term investors. Plus, the initial expense compensates your advisor for their time and expertise in helping you choose your funds and maintain your retirement plan over the years. Those skills often end up paying for themselves in the form of higher returns over time.

Understand your overall cost: To understand the value of what you’re purchasing, you have to have a clear picture of your overall cost, Clayton said. “It’s a professional’s job to give you that information, and it should happen before you do business with them,” he explained. “If that conversation isn’t happening, ask questions until you understand why you’re investing in what you’re invested in and what it’s costing you.” Ask your investing pro to break down your expenses as a percentage and as a dollar figure so you can truly understand where your money is going.

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