It's not what you earn, it's what you keep. That old saying pertains to typical asset-based fees to manage retirement investments. If your individual retirement account or employer-sponsored 401k is invested in mutual funds, it's likely you're paying an annual percentage of account assets in fees. Over time, those fees can make a considerable difference in your retirement savings. While you'll be charged other fees for your retirement account, the management fees are highest.
According to the Portland, Oregon-based retirement planning consulting firm the Multnomah Group, the "largest element of costs for retirement plans are asset-based fees and expenses." Fees usually comprise between 75 to 95 percent of all fees and expenses payable from the plan's assets. Asset-based fees include charges for assets, investment products and insurance. Depending on the company, these fees might be referred to as account maintenance fees or investment advisory fees.
According to the Investment Company Institute, the average investor pays 2 percent of the assets annually in his retirement accounts in fees. Think of it this way -- if you're over 50 and contributing the maximum $6,000 per year to your IRA, you're really only adding $4,000 because approximately $2,000 is coming out of your approximately $100,000 retirement stash.
You pay the annual asset-based fees directly with an IRA. For a 401k, or 403b if you work for a non-profit organization, some fees may be paid from investment returns rather than an asset percentage. Ask your plan administrator for a copy of the prospectus, which includes all fees and how they are charged. The summary plan description for your retirement account should also say which fees the employer pays and which ones fall on the employee.
To avoid paying high fees, invest your IRA in stock index funds. These funds mimic their particular market index in and aren't actively managed. Research investments for your retirement funds, and ask mutual fund, bank or brokerage representatives exactly what the fees are and what services are included. If you want to skip even more fees, buy no-load mutual funds. When you do sell, look out for hidden costs such as back-end loads.
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