The keys to achieving a financially secure retirement are diligent saving, disciplined investing and controlling costs. If you accomplish all three, the chances of meeting your retirement savings goals are high.
While saving and investing strategies get the most attention, strategies to control fees can also make a big impact. One strategy everyone should follow: eliminate as many asset-based fees on your retirement savings as possible.
An asset-based fee is a perpetual fee that is charged as a percentage of your account value. Eliminating an asset-based fee of one-half of 1% will save more than $130,000 for a hypothetical investor who saves on average $8,000 a year over a 45-year career and is able to average a 7% rate of return.
For most, your employer's retirement plan represents your largest investable pool of assets. Starting there to understand your fees is a critical step in learning how to control them. Plan fees are separated into three types: investment, administrative and advisory. These fees are often asset-based, or charged as percentage of your account.
Your employer is charged with negotiating a competitive fee for all plan services and making sure these fees remain reasonable. Therefore, your employer is the best place to go for a summary of your plan's fees.
Armed with this information, you can evaluate your employer's plan cost vs. your alternatives. This analysis becomes especially important once you become eligible for a distribution from your plan and begin considering proposals from wealth managers wanting you to roll your plan assets into an IRA.
Years ago wealth managers stopped pushing commission-based products and started pushing asset-based fee arrangements that often range between 1 and 2% of your total portfolio annually.
This business model has the benefit of discouraging account churning but has the disadvantage of generating recurring fees that may seem reasonable at first but often become unreasonable over time as your account increases in value.