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Watch Out for These Hidden Retirement Fees and How to Avoid Paying Them!

Most financial advisors advise their clients to save and build their retirement fund while they’re still young. Our retirement funds serve as our life support the moment we stop working. That’s why most young workers nowadays tend to seek investments with high returns to maximize their retirement funds.

But before you indulge yourself in focusing on returns, you might want to think twice first. Why? It’s because most investors have no idea they’d still be paying some hidden fees when they retire, which defeats their purpose of building retirement funds. These financial experts reveal these hidden retirement fees and what you can do to avoid them.

The Hidden Fees

Before you fret about how these hidden retirement fees deplete your funds, the financial experts advise you to be calm first. The good news is that these retirement fees continue to decline over the years, so it’s possible that you’ll only be paying lesser fees today.

According to Morningstar study, the average retirement fees plummeted down to 8% in 2017, the biggest decline ever recorded in one year so far.

Meanwhile, Fidelity became the first investment company in the United States to offer index funds to its client without any management fees. Vanguard Groups and Charles Schwab, on the other hand, have been lowering their management fees as well to compete with Fidelity.

An investor may think that paying these little fees won’t hurt your investments in mutual or exchange-traded funds, but financial experts warn it can take a huge toll on your potential investment returns.

Despite these lower retirement fees, many investors still don’t realize how much money they’re wasting in the first place by paying these fund fees, which should’ve been added to their retirement funds. Remember that as your investment returns compound over time, and so do these retirement funds. Your payments could accumulate up to 2% (or more).

The Scenario

America’s Best 401(k) chief strategist officer Josh Robbins also stated how the 2% fee is misleading the investors into thinking they’re only paying a small amount for their retirement fees.

Robbins also warns investors to watch out for the following retirement fees which are draining their retirement savings:

The Expense Ratios

This refers to the annual fees by all exchange-traded funds, index funds, and mutual funds integrated into your retirement savings. They cut a percentage of your investment in the fund depending on its annual yield. The expense ratios apply to all types of retirement funds like your 401(k), brokerage account, or individual retirement account.

Mutual Fund Transaction Fee

This refers to a trade commission or fees you give to a broker who will buy and sell mutual funds or stock on your behalf.

Sales load

These fees emerge when a broker tries to sell a fund to you that has a commission or sales charge. The broker will earn money the moment they sell these funds successfully.

Administrative fees

This refers to the fees associated with maintaining your portfolio or brokerage account.

Checking Your Retirement Fees

Robbins also cited examples of how these fees can drain your retirement account. For example, you have investor #1 who’s paying 1% of retirement fees and investor 2 with 2% fees. The latter investor will run out of money a decade sooner than investor 1 if he doesn’t pay attention to his retirement fees.  

To determine whether your retirement fees are too high, you need to read the fee disclosure as well as the expense ratios on mutual funds you’re interested in first before you start investing.

The Morningstar director of personal finance Christine Benz also recommends availing lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%. This will help balance your investment accounts and minimize your retirement fees.  

Benz also added that sometimes your retirement fees depend on the advice you’re getting. For example, if you are seeking a human financial advisor who actively manages your fund well, then you have to pay more retirement fees compared to having a robo advisor.

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