It's said that what you don't know can't hurt you. No so. What you don't know can cost you, and sometimes cost dearly. Case in point: Advisers and others say there's a host of unknown costs and fees lurking inside your 401(k) plans, IRAs and other such retirement accounts. And often, those fees can make a world of difference in your overall investment returns.
Now truth be told, many an expert and firm the most famous of all being Vanguard are beating the drum about how 401(k) fee can be a drag on performance.
Many Americans are simply unaware of the fees they pay to their plan providers. More than seven in 10 (71%) 401(k) plan participants incorrectly reported that they did not pay any fees and 6% said that they did not know whether or not they pay fees, according to a recent AARP study.
Of note, AARP launched a 401(k) fee calculator on its web site that aims to help investors better understand 401(k) fees and their potential impact. You have to register to use the calculator, but it's easy. See the AARP 401(k) fee calculator here.
And come Jan. 1, 2012, plan sponsors will have to disclose the fees participants pay for their 401(k) plans.
But there are other lesser-known fees to consider. Case in point: An adviser with whom I am acquainted recently switched brokerage firms. And as is the custom in that world, he began asking his clients to move their accounts from the old brokerage firm to the new one. Well, as it turns out, those clients who moved their IRA accounts were whacked with two unexpected fees one was the so-called account transfer fee and another was the annual maintenance fee.
"Brokerage firms do not like having assets transferred out, so they like to create fees and charges to discourage asset transfers," said Michael J. Sommers, CPA/PFS, of Advanced Tax Strategies, PC
Advisers say the account termination and annual maintenance fees are perhaps the most common of the lesser-known fees and other examples of these costs abound. Jason Branning, a certified financial planner with Branning Wealth Management, LLC, moved his client accounts from one large custodian (firms that hold the assets that advisers manage for clients) to another some seven years ago and faced the very same fees.
Another variation on the account termination fee comes with retirement accounts that use managed-money programs, such as mutual fund wrap accounts. Often, these accounts have termination fees that must be paid prior to money being moved from the current manager to a new money manager, according to Timothy P. Bogert, CLU, ChFC, LIC, AIF.
Those fees, which are generally subtracted from the account balance prior to the transfer, might include that quarter's asset fee, management fee and custodian fee all of which are usually billed at the end of each calendar quarter.
And, depending on how the mutual funds owned in the account were purchased if they are A shares, B shares, or C shares there might be contingent deferred charges as well, Bogert said.
In some cases, those fees can catch account owners unaware. "Clients often fail to read the fine-print custodial disclosures that explain custody fees, annual maintenance fees and termination fees," said Branning. But in many cases, Branning said, these fees are unavoidable for all but the largest accounts. "There seems to be no way around the custodian assessing fees; retirement accounts require special reporting by the custodian," he said.
According to Denise Appleby, CEO and founder of RetirementDictionary.com, the fee with which most owners are familiar is the annual maintenance fee, which on average runs $35 to $50. "For an IRA with a large balance, this may seem negligible," she said. "But for a small balance for instance, someone just starting an IRA with a $5,000 contribution, a $50 maintenance fee is 1% of the account balance. This is in addition to any ticket charges and commissions charged for trades placed with the contribution. Not all custodians charge this fee, and some will waive it if the account balance is in excess of a specified amount."
10 fees that are eating up your retirement savings
According to Appleby, here are 10 of the fees that can eat away at your retirement savings:
1. Account termination fees
2. Account maintenance fees
3. Various account transfer fees
4. Roth conversion fee: This is usually charged when a traditional IRA is converted to a Roth IRA.
5. Federal fund wire fee and overnight delivery fee: For account owners who are unable to wait for regular delivery and instead choose to have the funds sent via federal fund wire, which usually means same day receipt, a fee might be charged to the IRA, as well as by the bank that receives the funds. For overnight delivery of checks, an express delivery fee might apply.
6. "Special investment" fee: According to Appleby, this fee applies to non-traditional/non-publicly traded investments such as private placements, real estate and certain limited partnerships. She said this fee can range from a few hundred dollars to more than $2,000 per year.
7. "Special investment" set-up fee: As with the special investment fee, this fee also applies to non-traditional investments that are not publicly traded. But unlike the special investment fee, it's not an ongoing fee. Such fees are usually one-time charges applied for reviewing and setting up the investment, Appleby said.
8. Form 990-T filing fee: For accounts that hold non-traditional/non-publicly traded investments, the custodian/trustee may need to file IRS Form 990-T with the to report unrelated business income. This fee can be up to a few hundred dollars.
9. Loan processing fees: Account owners who take loans from their 401(k)/403(b) or other employer plan account may be charged a loan processing fee, said Appleby.
10. Recordkeeping fee: And Appleby said small business owners with solo-K/individual-K plans may be charged a recordkeeping and filing fee of several hundred dollars, if they use the services of a recordkeeper. This is in addition to fees charged by the custodian.
While the fees are troubling, there are some things you do about it to make the costs less onerous. "We can't make the fees go away, but there may be a tax-efficient way to pay them," said Sommers. "If the account owner can be billed direct, and if allowed by the custodian, some fees may be able to be paid direct by the account owner which may have some tax benefit."
So, for instance, if the account owner is in the so-called "accumulation" phase of saving for retirement, it would also make sense to pay any allowable fees with what's called non-qualified money, money outside of the retirement accounts. "This would allow more money in the account to grow tax-deferred, Sommers said.
By contrast, if an account owner is in the distribution phase of retirement, it may make sense to have these fees paid from the qualified account, Sommers said.
Other even more obscure fees include those sometimes absorbed by the plan sponsor that effect plan participants in subtle ways. "I have come across 401(k) plan sponsors who suffered a market value adjustment because they fired the third-party administrator (TPA) and tried to move the stable value fund to a new provider where the Committee on Uniform Security Identification Procedures (CUSIP) was attached to the TPA," said Ary Rosenbaum, an attorney with Rosenbaum Law Firm P.C. "In that stable value fund, this restriction was added because the producing TPA received an extra 25 basis points in fees. There are also termination costs that some TPAs don't spell out."
And though it's not a fee, Bogert said one troubling trend with 401(k) plans is this: Depending on the type of investment the participant has chosen, the money manager may have actually frozen the assets in a fund or investment. "I have seen this happen over the past three years with the market meltdown," Bogert said. They may totally freeze withdrawals for a period of time or limit the withdrawals to a percentage in the fund over a period of time. If a plan participant has money in a fixed account this can happen too."
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.