Making an annual contribution to a retirement plan? A recent study could give you pause. It says that more than half of the average person's IRA contribution is being eaten away in fees.
"People need to understand that fees are lethal," said
The study focused on the
Using data published by the fund industry's primary trade group, the
The average saver contributes
"Fees are a huge deal," said Roth, who sponsors a Web site called DaretobeDull.com. "The more you save, the bigger the impact."
Fees hit diligent savers the hardest because mutual fund fees are calculated as a percentage of your assets. Thus, a person with a
"Even though 1 percent or 2 percent seems like a little bit, it's 1 percent to 2 percent of all of your money every year," Tuchman said. "That's a big portion of your investment profits."
In fact, it's about half of the average investor's "real" return, Roth said.
The typical investor can figure on a 7 percent to 7.5 percent average annual return in a diversified portfolio, Roth said. But about 3 percent of that return is eaten up by inflation. If you earn 7 percent, your return after inflation is just 4 percent on average. Now pay 2 percent in fees and roughly half of your return is gone.
What does that cost you in real money? The answer depends on how much you save and for how long.
Tuchman estimates that a 35-year-old who puts
So, what's the solution? Both Tuchman and Roth recommend the same course: Buy only index mutual funds or so-called exchange traded funds, which mimic the returns of a broad market index.
Index funds and ETFs typically charge paltry fees because there's no "management" required. They simply buy all the stocks that make up a set index -- such as the
The only time these funds will trade the stocks they own is when a company disappears from the relevant index as the result of a merger, acquisition, business failure or change in the index structure.
(That's a benefit to people who invest outside of retirement accounts too, Roth notes. That's because actively managed funds trade stocks, generating capital gains that investors have to pay tax on each year. Because index funds don't trade, they don't generate taxable gains. Their shares appreciate, just like the others. But you have to pay tax on the gains only when the stock is sold.)
What if you're investing in a 401(k) plan that doesn't offer index funds or ETFs? At least find out how much you're paying, Tuchman suggests.
To do that, look up your fund at
At the top of the page, you can enter the ticker symbol for any fund you are invested in to access a full report. Near the top of the fund report page is a button for "expenses." Click on that and you can find out what percentage of your assets are being paid out to manage the fund.
Now multiply the amount you have invested in that fund by the relevant fee to find out how much you, personally, pay annually. If you had
On the other hand, if your assets were invested in Van Eck Multi-Manager Alternatives (VMAIX), an actively managed fund that tries to beat market performance, you'd be paying 2.3 percent of your assets, or
"The investment advisor does no more work to manage a
"So the closer this investor gets to retirement, the more he's paying in fees," he said. "It's like pressing on the brakes when you start getting near to your destination."
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(c) 2010 Kathy Kristof