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Banks and financial institutions rarely go out of business. This is good because it promotes stability, confidence, and security for those interested in investing their money. However, it also means that banks and financial institutions are very good at making money, often through hidden fees in 401K plans and other investment accounts.
One of the many ways banks and financial institutions make money is by charging customers fees for various services, such as managing retirement accounts and 401(k)s. Whether you’re new or a seasoned investor, you can make the most of your retirement funds by avoiding fees, hidden or otherwise, and regularly reviewing costs associated with your investments.
Here are fifteen fees that you should try to minimize or eliminate in your retirement accounts.
Administrative Fees
Administrative fees, like telephone service costs and online customer portal maintenance, can be exhaustive and all-encompassing. These fees include any costs a financial institution incurs to manage your investment account. Administrative fees vary widely between institutions.
Sales Charges
Again, the magnitude of these fees is highly dependent on the investment product and provider. However, it is safe to assume that there is likely a fee every time you or the fund manager buys or sells an investment product. Some providers offer to waive these fees as an incentive for investors above a certain asset level.
Management Fees
Investment accounts are typically active or passively managed by an investment broker, but with the rise of electronic trading, AI-driven robo-investing has also increased. Due to advanced algorithmic calculations, the hope was that automated Investing would lower costs and beat market averages, but the definitive success of automated trading has yet to be seen.
Transfer Charges
Transfer charges may be incurred if you were in one mutual fund but decided to move to another, left an employer and rolled an account to a new financial institution, or swapped your stocks in favor of bonds. Of course, these may not be the only fees incurred by the abovementioned examples.
Statement Fees
How you receive your statements and different fund-related information may cost you. Most often, clients are charged for receiving physical copies by mail. However, you may be able to eliminate this expense by receiving electronic copies of your account documents instead.
Preparation of Tax Documents
Capitol gains, losses, 401(k), and HSA contributions have different tax consequences, some beneficial and some detrimental. Either way, your financial institution may charge you a fee for preparing the tax documents you need each year.
Tax Penalties
Tax penalties are standard fees worth avoiding. The best way to prevent them is to know the rules and restrictions for each type of investment product. Roth IRAs have much different long-term tax consequences compared to traditional IRAs, and IRAs are taxed much differently than the sale of individual stocks. This is where having a knowledgeable advisor on your side can
Investment Fees
These fees can be calculated as a flat fee to join a particular investment fund or buy a specific product. They can also be calculated as an ongoing percentage based on total assets or returns. Where administrative fees can be seen as the cost of being a client, investment fees depend on your particular investing strategy and preferences.
Individual Service Fees
Taking loans from investment accounts is rare but is valuable in some cases. For example, an individual may take a hardship distribution from a 401(k) to pay for medical, funeral, or tuition expenses. However, your plan administrator may charge fees for preparing the necessary documents and the tax consequences levied by the government.
12b-1 Fees
These fees are explicitly earmarked for broker commissions and the cost of advertising or marketing different mutual funds to brokers. As previously mentioned, investing has layers, and many intermediaries are involved. Choose your funds and advisors carefully to avoid incurring these fees. Working with an online broker that doesn’t charge these fees or opting for specific fund types like EFTs are ways to eliminate these expenses.
Planning Software
Many financial institutions will provide financial planning software as an added service. This software can be valuable for those who prefer a more hands-on approach to investing, as opposed to or in addition to working with a financial advisor.
Trustee Services
If you’ve established a trust for any of your financial assets, you’re likely to incur fees for the day-to-day management of that trust. The amount and how those fees are assessed will greatly depend on how you and your estate attorney wrote your trust and what phase the estate plan is in.
Investment Advice
Incurring fees for investment advice is one of the most counterintuitive expenses. Working with a knowledgeable advisor can be money well spent on long-term strategy and navigating taxes. However, with proper due diligence and vetting your advisor, you are more likely to receive the most valuable information for your situation.
Online Transactions
Knowing online transaction fees is even more critical if you prefer self-directed investing. These fees may be calculated per trade or as a percentage of investment value. Regardless, your financial institution should provide a fee schedule for each type of trade and asset class.
Anticipating and Minimizing Investment Fees
Most 401(k) fees depend on which financial institution you work with, how frequently you make changes, and what types of investment products you select. Review your plan prospectus and annual reports to better understand how your investment products are managed and their associated fees. Not all fees are calculated the same way, and not all investment accounts have exact costs.
Research how many intermediaries are involved in providing the investment products you want. Employer-sponsored programs have significantly higher fees since multiple parties are involved. If you feel confident staying up to date with market changes, don’t hesitate to establish a self-managed account. Doing so could save you tens of thousands over the lifetime of your investments.
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