Wednesday, June 20, 2018

Fund management fees in a cooling stock market. They matter

"Although we work through financial markets, our goal is to help Main Street, not Wall Street." -- Janet Yellen, former chair of the Board of Governors of the Federal Reserve System. (1946 -   ) 


BY JULIA ANDERSON
With global stock markets treading water it’s time to pay more attention to manage fees on your tax-deferred and/or tax-free retirement accounts.


 Why? Fees can cut into your long-term investment savings results.  One adviser calls it “death by a thousand cuts.”


In a flat market, fees become even more important because while the value of your portfolio may stop growing, fees continue to siphon off revenue. (Your money!!!)


Ask yourself:


Do you know and understand the management fees that you are paying on your managed stock funds and other retirement investment products? (Both before your retirement and while living in retirement).


 What are those fees? The average annual fund fee, according to Brightscope.com, is 0.39 percent. Costs are lowest for the largest plans because those plans have “buying power” with management services.


 Are there cheaper fee options inside your fund menu while still giving you maximum revenue growth potential?


 There are two types of fees: Administrative fees related to record-keeping and investment and advisory service fees. They may be reported separately as fees and expenses.


 After the Great Recession, the U.S. Dept. of Labor implemented a new fiduciary rule requiring that advisers to 401(k) plans always act in the best interest of the plan participants. Who knew that that wasn’t always the case before?! Strict implementation of that rule is now in limbo because of Trump administration adjustments but advisers are more obligated to follow the rule for fear of class-action legal challenges and general awareness of investors.
 

The best way to compare your 401(k) management fees is with peer groups of similar size. (click here) If the information leaves you with more questions, talk to your employer. You may be surprised that your company CFO may not know any more than you do about what fees are being charged to employee accounts. However, your questions may spur deeper investigation by your employer into the outside firm providing retirement fund management services. 


 If you are unhappy with your 401(k) program, withhold just enough money from your paycheck to get the company matching money that goes with the account. Then set up your own IRA or Roth IRA where you can automatically put the rest of your long-term savings. The fees on individual accounts with online brokers are more competitive and transparent and LOWER.
 

Also, if you leave a job you may want to move your 401(k) account. An existing IRA or Roth IRA is a nice place to stash your savings and a great way to avoid paying taxes and penalties because of an early withdrawal.

 Here’s an apples and apples comparison for why fees are important from CNBC.com:


 You put $25,000 in a 401(k) that earns an average of 7 percent a year over 35 years without further contributions. Earning are reinvested. With an annual management fee of 0.5 percent, the total result after 35 years will be $227,000.


If your $25,000 in a 401(k) earns 7 percent over 35 years (reinvested) but has an annual management fee of 1.5 percent, the result will be $163,000. That’s 28 percent less!!!


 While 1 percent may not seem like much, your higher fund management fee cuts into the long-term power of reinvestment year after year. Should we call this a rip-off? Yes.


 Federal regulations require that fund managers report fees levied on 401(k) funds every quarter. But these disclosures may not be easy to understand. Having a friendly face-to-face chat with your employer’s accounting/administrative staff may encourage them to look into 401(k) management fees and then negotiate lower fees. They have as much to gain as you do.


 FOR MORE:
Brightscope.com  - “shining a light on mutual funds, 401(k) plans and financial advisors. Click here.


BrightScope is a financial information and technology company that ”brings transparency to opaque markets.” A resource of better decision-making.


 “Five Ways to Improve 401(k)s," Wall Street Journal, click here


"How a 1 percent fee could Cost Millennials $590,00 in Retirement Savings," Nerdwallet, click here.

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