When many of us think of threats to our investment portfolios, we focus on stock market crashes, inflation and taxes. When building a portfolio, it makes sense to recognize these threats and work to minimize their impact.
However, while looking for more obvious threats, many of us neglect to pay attention to the fees we are paying -- especially for our 401(k)s. A study recently released by NerdWallet's investing division, InvestingNerd, indicates that 92.6 percent of Americans underestimate the total 401(k) fees they will pay over a lifetime.
While you plan to minimize the way inflation and taxes erode your real returns over time, and while you shore up your portfolio against the next crash, don't forget to take a few minutes to consider how to combat fees.
How Fees Cost You
Investment fees cost you in two ways:
--Direct costs: Your fees are often taken directly out of your investment account. Whether it's your retirement account, or a taxable brokerage account, the fees come straight out of your account. This represents a direct reduction to your investment account.
--Opportunity costs: The fees you pay also come with an opportunity cost. Now that the money is out of your account, you can no longer earn returns on it. Over time, this missing money can add up. Demos estimates that by the time you add up the opportunity cost to your 401(k), you could be $155,000 poorer during the course of your life. And that's just the 401(k); it doesn't address other fees.
Some of the fees that you are likely to encounter while you invest include transaction fees, expense ratios, administrative fees, loads, and other account fees. Depending on the accounts you have, where you hold your investments and the types of investments you choose, the fees you pay can really start to add up over time.
Reduce the Impact of Fees on Your Portfolio
It's true that there is no way to completely avoid fees. Just as you can't avoid inflation, or completely avoid taxes, you will have to pay some. However, you can reduce the fees that you pay over time. It just requires a little planning.
First of all, try to find low-cost investments. If you are investing with the help of a discount broker, consider the transaction costs. Some brokers charge as much as $9.99 (or more) to execute a stock trade. A mutual fund transaction can cost even more. However, there are several brokers that offer transaction fees as low as $4.95. And some of the no-frills brokers are even less expensive.
Also consider what you pay in terms of expense ratios. There are ETFs with expense ratios as low as 0.04 percent (though you will have to pay a stock transaction fee). Some brokers will allow you to buy certain low-cost index funds without transaction fees.
If your fee problems are the result of how your employer-sponsored retirement plan is constructed, you still have recourse. If you don't have access to the low-cost investments you prefer, talk to your human resources department. It's possible to change to a different plan administrator. If that doesn't work, consider moving your money. If you are eligible, you can roll your plan into an individual retirement account, where you can have more control over what investments you choose.
Just by paying attention, and by planning out your investments a little bit, it's possible for you to reduce the fees you pay. You'll keep more of your money over your lifetime, and your financial future will be a little more secure.
Miranda is a freelance contributor to several investing and personal finance web sites. She also writes for her own blog, Planting Money Seeds.